SEPARATION 

OF  STATE  AND   LOCAL  REVENUES 
IN  THE  UNITED  STATES 


BY 

MABEL  NEWCOMER,  A.  M. 

Instructor  in  Economics  in  Vassar  College 

Sometime  Garth  Fellow  in  Economics  in 

Columbia  University 


SUBMITTED   IN    PARTIAL   FULFILMENT   OF   THE   REQUIREMENTS 
FOR   THE   DEGREE   OF   DOCTOR   OF   PHILOSOPHY 

IN  THE 

FACULTY  OF  POLITICAL  SCIENCE 
COLUMBIA  UNIVERSITY 


NEW  YORK  ** 

1917  « 


EXCHANGE 


SEPARATION 

OF  STATE  AND   LOCAL  REVENUES 
IN  THE  UNITED  STATES 


BY 

MABEL  NEWCOMER,  A.  M. 

Instructor  in  Economics  in  Vassar  College 

Sometime  Garth  Fellow  in  Economics 

Columbia  University 


SUBMITTED   IN   PARTIAL   FULFILMENT   OF   THE   REQUIREMENTS 

FOR   THE   DEGREE   OF   DOCTOR   OF   PHILOSOPHY 

IN  THE 

FACULTY  OF  POLITICAL  SCIENCE 
COLUMBIA  UNIVERSITY 


NEW  YORK 
1917 


\1 


PREFACE 


The  problem  of  the  separation  of  state  and  local  rev- 
enues is  one  which  has  received  much  attention  recently 
from  students  of  finance  and  state  officials,  and  while  it 
has  not  yet  been  widely  adopted  it  is  almost  invariably 
discussed  when  financial  reforms  are  under  consideration. 
In  this  monograph,  the  writer  has  endeavored  to  make  a 
comparative  study  of  separation  in  those  states  where 
this  aspect  of  the  relation  of  state  and  local  revenues  is 
most  prominent — attempting  to  ascertain  the  causes  of 
its  growth,  its  relation  to  increases  in  revenue  and  ex- 
penditures, and  its  effect  on  the  distribution  of  the  tax 
burden. 

The  writer  wishes  to  take  this  opportunity  to  acknowl- 
edge her  indebtedness  to  Professor  Stephen  I.  Miller  of 
Leland  Stanford  Junior  University  for  suggesting  the 
subject  of  the  monograph,  and  to  Professor  Edwin  R.  A. 
Seligman,  under  whose  direction  the  study  has  been  made. 
Thanks  are  also  due  to  Professor  Robert  M.  Haig  for 
much  helpful  criticism,  to  Professor  Carl  C.  Plehn  of  the 
University  of  California  and  Mr.  A.  C.  Pleydell  of  the 
New  York  Tax  Reform  Association  for  reading  portions 
of  the  manuscript  and  for  making  many  valuable  sug- 
gestions, and  to  those  state  officials  who  have  courte- 
ously supplied  the  writer  with  information  not  available 
in  their  published  reports. 

MABEL  NEWCOMER. 

COLUMBIA  UNIVERSITY,  APRIL  23,  1917. 

299]  5 


«  o 


8  CONTENTS  [302 

Section  Page 

CHAPTER  VI 
PARTIAL  SEPARATION  IN  NEW  JERSEY 

1.  State  and  Local  Tax  System 92 

2.  Effects  of  Separation • 96 

CHAPTER  VII 
PARTIAL  SEPARATION  IN  VERMONT 

1.  History  of  Taxation  in  Vermont 104 

2.  Effects  of  Separation in 

CHAPTER  VIII 
PARTIAL  SEPARATION  IN  WEST  VIRGINIA 

1.  History  of  Taxation  in  West  Virginia 119 

2.  Effects  of  Separation 1 23 

CHAPTER  IX 

SEPARATION  IN  CALIFORNIA 

1.  Introduction 127 

2.  History  of  Taxation  in  California 128 

3.  Achievement  of  Separation  in  1910 137 

4.  Administration  of  the  New  Law 145 

5.  Litigation 149 

6.  Shifting  of  the  Tax  Burden 149 

7.  Revenues  and  Assessments  Under  the  New  System 157 

8.  Growth  of  Expenditure 158 

9.  Administrative  Changes 170 

10.  Outlook 171 

CHAPTER  X 

MOVEMENT  TOWARD  SEPARATION  IN  THE  UNITED  STATES  AS  A  WTHOLE  .  .  176 

CHAPTER  XI 

CONCLUSIONS 182 

BIBLIOGRAPHY 192 


CHAPTER  I 

INTRODUCTION 

I.  FAILURE  OF  THE  GENERAL  PROPERTY  TAX 

IN  the  United  States  at  the  present  time  there  exists  a 
growing  dissatisfaction  with  the  state  and  local  revenue 
systems.  Such  dissatisfaction  is  not  new  nor  is  it  peculiar 
to  this  country,  but  a  number  of  causes  have  contributed  in 
making  the  problem  unusually  serious  here  in  recent  years. 

Revenue  systems  are  rarely  kept  abreast  of  needs.  By  the 
time  a  need  has  become  sufficiently  acute  to  be  felt,  analyzed, 
and  met  with  proper  legislation,  conditions  have  often  so 
changed  that  such  legislation  is  inadequate,  if  not  positively 
injurious.  Hence  the  satisfaction  lags  behind  the  manifesta- 
tion of  the  need,  and  discontent  arises  in  approximate  pro- 
portion to  the  lag.  If,  as  seems  to  be  the  case,  the  need  is 
not  met  as  quickly  in  the  United  States  as  in  other  pro- 
gressive countries,  the  fact  may  be  attributed  in  part  to  more 
rapid  development,  and  in  part  to  less  effective  governmental 
machinery, — although  greater  unwillingness  to  submit  to 
unsatisfactory  conditions  may  be  held  accountable  for  much 
complaint.  And  if,  as  is  undoubtedly  the  case,  dissatisfac- 
tion has  increased  in  the  past  few  decades,  this  may  be  at- 
tributed on  the  one  hand  to  the  rapid  growth  of  expenditures 
resulting  from  increasing  governmental  activities,  and  on  the 
other  to  the  development  of  such  varied  forms  of  wealth  and 
such  complex  industrial  conditions  that  the  locally  admin-' 
istered  general  property  tax,  which  is  so  widely  employed  in 
303]  9 


I0      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [304 

this  country,  is  no  longer  adequate  to  meet  the  situation.1 
As  long  as  land  was  plentiful  and  other  forms  of  wealth 
comparatively  scarce — as  long,  that  is,  as  agriculture  com- 
pletely overshadowed  manufacturing  in  importance — the 
general  property  tax  was  not  grossly  unjust  or  very  op- 
pressive. But  with  the  increase  of  intangible  property  and 
the  extension  of  business  beyond  local  and  beyond  state 
boundaries  an  increasing  amount  of  taxable  property  evades 
its  share  of  the  tax,  and  our  rapidly  increasing  expenditures 
must  be  met  by  a  tax  on  a  narrowing  base. 

The  general  property  tax,  employed  by  practically  all 
countries  during  some  phase  of  their  development,  has  been 
abandoned  as  the  main  source  of  revenue  by  all  well  de- 
veloped countries,  with  the  exception  of  Switzerland,  Aus- 
tralia and  the  United  States ;  and  it  is  no  longer  adaptable  to 
the  conditions  existing  in  these  countries.2  Arising  as 
a  simple  way  of  producing  the  necessary  revenues  in  small 
agricultural  communities,  it  has  been  allowed  to  remain,  al- 
though never  very  satisfactory,  and  long  since  outgrown. 
Under  present  conditions  it  not  only  fails  to  reach  much 
intangible  property  but  it  permits  of  gross  inequalities  in  the 
assessment  of  tangible  property.  Further,  the  right  of  the 
locality  to  derive  taxes  from  corporate  property  within  its 
jurisdiction  is  often  questionable. 

It  is  in  order  to  abolish  unequal  local  assessments  (or  at 
least  to  avoid  the  evil  consequences  of  such  inequalities), 
to  reach  corporate  property,  which  comprises  a  large  share 
of  intangible  property,  and  to  do  away  with  the  unequal 
distribution  among  local  divisions  of  the  proceeds  from  the 
tax  on  public  utilities,  that  separation  has  been  proposed. 

1  Cf.  Edwin  R.  A.  Seligman,  Essays  in  Taxation  (Revised  Ed.,  1913), 
p.  347  et  seq. 

2  Ibid.,  p.  140.     Switzerland  may  constitute  in  the  minds  of  some  an 
exception  to  this  statement. 


305]  INTRODUCTION  ll 

This  last  reason  Professor  Plehn  holds  to  be  the  controlling 
one.  Equal  assessment,  he  believes,  may  be  obtained  in 
other  ways,  and  also  satisfactory  taxation  of  corporations, 
but  only  through  separation  can  the  satisfactory  distribution 
of  taxes  from  public  utilities  be  realized.1  However,  it  is 
generally  considered  to  be  primarily  an  administrative  re- 
form, designed  so  to  improve  the  machinery  of  the  revenue 
system  that  taxes  may  be  levied  and  collected  with  an  ap- 
proach to  justice  and  efficiency.  "  The  separation  of  state 
and  local  revenues  is  not  a  cure,"  says  Professor  Seligman, 
"  but  it  will  help  to  make  a  cure  possible."  2 

2.    MEANING  OF  "  SEPARATION  OF  STATE  AND  LOCAL 
REVENUES  " 

The  term  "  separation  of  state  and  local  revenues  "  is  ap- 
plied to  various  methods  of  taxation.  When  first  proposed 
as  a  definite  fiscal  measure  it  was  used  to  denote  a  system 
in  which  state  and  local  revenues  are  derived  from  wholly 
independent  sources.  This  practically  means  that  there  shall 
be  no  state  tax  levied  pn  general  property,  the  state  revenue 
being  obtained  from  taxes  on  special  classes  of  property 
which  are  exempted  from  local  taxation.  This  method, 
separation  of  the  sources  of  state  and  local  revenues,  is  the 
one  ordinarily  designated  by  the  term,  and  the  one  most 
widely  adopted  in  the  United  States,  although  in  no  case 
has  such  separation  of  sources  been  strictly  observed. 

As  defects  in  this  system  have  been  revealed,  various 
modifications  and  substitutions  have  suggested  themselves. 
These  have  been  advanced  under  the  name  of  separation  as 
possible  improvements  over  the  first  system.  One  important 

1  Proceedings  of  the  Ninth  National  Conference  on  State  and  Local 
Taxation,   1915,  p.  51.    Hereafter  these  Proceedings  will  be  referred 
to  as  Conference. 

2  Seligman,  op.  cit.,  p.  351. 


12      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [306 

modification,  first  suggested  (1899)  by  Mr.  Allen  Ripley 
Foote  *  in  order  to  obviate  the  inelasticity  of  revenues  and 
the  danger  of  extravagant  state  expenditure,  is  the  intro- 
duction of  apportionment  by  expenditure, — viz.,  that  the 
state  revenue  required  in  addition  to  the  yield  of  special 
taxes  shall  be  derived  from  a  direct  tax  on  property,  ap- 
portioned among  the  local  divisions  according  to  local  re- 
venue or  expenditure  instead  of  according  to  assessed  valu- 
ations. This  is  as  effective  as  separation  of  source  in 
equalizing  assessments,  and  if  used  only  as  a  supplementary 
tax  does  not  seriously  interfere  with  the  other  benefits  of 
separation. 

More  recently  Professor  Plehn  has  advanced  another 
method  which  he  designates  as  "  pure  separation,"  as  dis- 
tinguished from  "  segregation/'  The  latter  term  he  ap- 
plies to  separation  of  source,  i.  e.  to  systems  where  property 
is  classified  for  taxation  and  divided  between  the  state  and 
the  localities, — it  being  a  matter  of  indifference  whether  the 
various  classes  of  property  are  taxed  in  the  same  way  or  in 
different  ways.  "  Pure  separation  "  occurs  where  different 
taxes  are  used  by  the  state  and  the  localities,  although  these 
taxes  may  be  derived  from  the  same  source.  The  California 
method  of  reserving  corporate  property  for  the  state  and 
assigning  the  property  of  natural  persons  to  the  local  divis- 
ions is  segregation ;  whereas  a  system  employing  the  general 
property  tax  for  local  purposes  and  an  income  tax  for 
state  purposes  would  be  pure  separation.  Separation  of 
source,  with  certain  modifications,  is  the  method  which  has 
been  most  widely  advocated  and  most  generally  applied  in 
the  United  States,  and  consequently  it  is  the  method  most 
frequently  discussed  and  most  vigorously  opposed.  This 
is  the  form  of  separation  which  will  be  considered  in  this 
monograph. 

1  Seligman,  op.  cit.,  p.  359  n.  2  Conference,  1915,  p.  58. 


307]  INTRODUCTION  I$ 

3.    THEORY  OF  SEPARATION 

In  examining  either  the  efficiency  or  the  equity  of  a  revenue 
system  two  relations  must  be  considered :  first,  the  relation 
of  the  individual  to  the  state;  and  second,  the  relation  of 
the  central  to  the  local  governments.  In  other  words  there 
are  two  fundamental  problems  to  be  solved, — the  problem 
of  the  distribution  of  the  burden  of  revenues  among  the 
inhabitants  of  a  state  on  the  one  hand,  and  on  the  other  the 
problem  of  the  division  of  administration  and  of  yield 
among  the  various  jurisdictions. 

One  solution  has  been  offered  for  both  of  these  problems.1 
It  is  to  charge  in  proportion  to  benefit  for  those  services 
the  individual  benefit  of  which  is  measurable  and  to  make 
the  administration  of  such  services  and  the  administration 
and  use  of  the  revenues  derived  from  them  local  functions. 
Services,  on  the  other  hand,  the  benefit  from  which  is  general 
and  cannot  be  assigned  to  particular  persons  or  properties, 
are  to  be  made  state  functions,  and  the  revenues  necessary 
to  perform  such  services  are  to  be  derived  from  taxes  im- 
posed according  to  ability  or  faculty. 

The  advocates  of  this  system  do  not  go  so  far  as  to  say 
that  all  functions  should  be  divided  between  the  localities  and 
the  state  according  as  the  individual  benefit  is  or  is  not  as- 
certainable.  They  would  not  radically  change  present  sys- 
tems. Rather  they  assume  that  the  present  division  of  state 
and  local  functions  corresponds  roughly  to  such  a  scheme. 
They  are  merely  attempting  to*  analyze  present  conditions. 
Unfortunately  in  practice  the  dividing  line  between  matters 
of  general  and  matters  of  local  concern  is  very  vague.  The 
fact  is  that  the  variations  in  different  countries  and  com- 

1  See  discussions  in  C.  F.  Bastable's  Public  Finance  (3d  ed.,  London, 
1903),  pp.  up  et  seq.,  393  et  seq.;  Seiigman,  op.  cit.,  p.  478;  G.  Schanz, 
"  Zur  Frage  des  Steuer  Prinzips  bei  den  Gemeinde-Steuern,"  Finanz- 
Archiz',  32  Jhrg.,  erster  bd.,  pp.  54-55- 


I4      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [308 

munities  at  the  same  time,  and  at  different  periods  of  time, 
are  so  great  that  it  is  scarcely  safe  to  call  any  function  dis- 
tinctly local  or  central.  The  division  suggested  does  not 
exist,  and  even  if  it  could  be  satisfactorily  made  the  locali- 
ties would  still  be  confronted  with  the  difficulty  of  assigning 
the  overhead  expenses  of  the  general  government,  the  special 
benefit  of  which  is  not  determinable. 

The  final  objection  to  such  a  scheme  is  that,  both  in  theory 
and  in  practice,  the  criterion  of  ability,  in  so  far  as  ability 
can  be  measured,  is  being  accepted  and  applied  in  many  cases 
where  the  individual  benefit  is  determinable.  The  use  of 
special  assessments  is  growing  rapidly,  and  such  assessments 
are  determined  by  benefit;  moreover,  benefit  is  the  primary 
consideration  in  charging  incorporation  fees  or  gas  rates, 
and  it  is  still  customary  to  cover  at  least  the  cost  of  service 
in  supplying  water  or  transportation  facilities.  But  in  these 
latter  instances,  at  least,  it  is  an  open  question  whether  the 
gain  in  well-being  which  might  be  obtained  by  charging  only 
a  nominal  sum  would  not  make  it  advisable  to  operate  such 
utilities  at  a  loss.  And  in  the  matter  of  education,  where 
special  benefit  is  largely  measurable,  the  criterion  of  benefit 
has  long  since  been  abandoned.  In  truth  the  standard  of 
ability  promises  to  supplant  that  of  benefit  in  a  large  number 
of  cases  where  the  individual  benefit  is  obvious ;  so  that  even 
if  it  might  be  conceded  that  local  affairs  were  always  those 
conferring  special  benefit  it  would  not  always  follow  that  the 
localities  might  defray  the  cost  of  their  activities  from  fees 
collected  in  carrying  them  on.  This  standard — that  state 
revenues  should  be  in  accordance  with  ability,  and  local  rev- 
enues in  proportion  to  benefit — was  advanced,  and  to  some 
extent  applied,  in  Prussia  as  the  standard  for  assigning  rev- 
enues to  the  state  and  local  governments  when  revenues  were 
separated  by  the  reforms  of  I895.1  No  attempt  has  been 

1  Seligman,  op.  cit.,  p.  478 ;  Schanz,  op.  cit.,  pp.  54-55- 


309]  INTRODUCTION  ^ 

made,  however,  to  apply  this  standard  where  separation  has 
been  introduced  in  the  United  States.  Other  principles  have 
been  observed,  both  in  assigning  the  sources  to  each  division 
of  government  and  in  justifying  such  assignment. 

Ability,  as  measured  by  progressive  rather  than  propor- 
tional taxes,  is  now  the  generally  accepted  principle  for  divid- 
ing the  burden  among  individuals.  Although  progressive 
taxes  are  at  best  a  crude  measure,  they  are  more  nearly  exact 
than  proportional  taxes;  they  at  least  approach  our  present 
conception  of  justice ;  and  they  have  the  additional  advantage 
of  producing  large  revenues.  Consequently  they  are  widely 
favored. 

But  no  such  well-recognized  guiding  principle  has  been 
offered  to  solve  the  other  problem, — that  of  administration 
and  division  of  revenues;  and  it  is  with  the  solution  of  this 
problem  that  separation  in  the  United  States  is  concerned. 
In  practice,  administration  and  use  of  revenues  have  usually 
gone  together,  especially  in  the  United  States,  though  even 
here  there  are  some  notable  exceptions.  But  this  would  not 
seem  to  be  necessary.  The  choice  of  the  administrative 
agent  may  be  determined  primarily  by  administrative  effi- 
ciency,— i.  e.,  the  collections  of  the  various  revenues  may  be 
put  into  the  hands  of  that  authority  best  able  to  collect  them, 
whether  or  not  they  are  to  be  used  by  that  authority.1  Ad- 
ministrative efficiency  is  not  always  dependent  on  use,  nor 
can  it  of  itself  be  accepted  as  justification  for  use.  Use,  or 
division  of  yield,  must  be  determined  by  some  less  tangible 
principle  of  right  or  need.  Consequently  this  problem,  which 
is  the  fundamental  problem  of  separation,  resolves  itself  into 
two  distinct  parts.  These  must  be  solved  separately,  for  the 
most  satisfactory  results  cannot  be  obtained  by  always  com- 
bining administration  and  use  as  under  separation  of 
sources.2 

1  Bastable,  op.  cit.,  p.  393  ct  seq.  2  Ibid.,  p.  404  et  seq. 


I4      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [308 

munities  at  the  same  time,  and  at  different  periods  of  time, 
are  so  great  that  it  is  scarcely  safe  to  call  any  function  dis- 
tinctly local  or  central.  The  division  suggested  does  not 
exist,  and  even  if  it  could  be  satisfactorily  made  the  locali- 
ties would  still  be  confronted  with  the  difficulty  of  assigning 
the  overhead  expenses  of  the  general  government,  the  special 
benefit  of  which  is  not  determinable. 

The  final  objection  to  such  a  scheme  is  that,  both  in  theory 
and  in  practice,  the  criterion  of  ability,  in  so  far  as  ability 
can  be  measured,  is  being  accepted  and  applied  in  many  cases 
where  the  individual  benefit  is  determinable.  The  use  of 
special  assessments  is  growing  rapidly,  and  such  assessments 
are  determined  by  benefit;  moreover,  benefit  is  the  primary 
consideration  in  charging  incorporation  fees  or  gas  rates, 
and  it  is  still  customary  to  cover  at  least  the  cost  of  service 
in  supplying  water  or  transportation  facilities.  But  in  these 
latter  instances,  at  least,  it  is  an  open  question  whether  the 
gain  in  well-being  which  might  be  obtained  by  charging  only 
a  nominal  sum  would  not  make  it  advisable  to  operate  such 
utilities  at  a  loss.  And  in  the  matter  of  education,  where 
special  benefit  is  largely  measurable,  the  criterion  of  benefit 
has  long  since  been  abandoned.  In  truth  the  standard  of 
ability  promises  to  supplant  that  of  benefit  in  a  large  number 
of  cases  where  the  individual  benefit  is  obvious ;  so  that  even 
if  it  might  be  conceded  that  local  affairs  were  always  those 
conferring  special  benefit  it  would  not  always  follow  that  the 
localities  might  defray  the  cost  of  their  activities  from  fees 
collected  in  carrying  them  on.  This  standard — that  state 
revenues  should  be  in  accordance  with  ability,  and  local  rev- 
enues in  proportion  to  benefit — was  advanced,  and  to  some 
extent  applied,  in  Prussia  as  the  standard  for  assigning  rev- 
enues to  the  state  and  local  governments  when  revenues  were 
separated  by  the  reforms  of  1895. 1  No  attempt  has  been 

1  Seligman,  op.  clt.,  p.  478 ;  Schanz,  op.  cit.,  pp.  54~S5- 


309]  INTRODUCTION  jcj 

made,  however,  to  apply  this  standard  where  separation  has 
been  introduced  in  the  United  States.  Other  principles  have 
been  observed,  both  in  assigning  the  sources  to  each  division 
of  government  and  in  justifying  such  assignment. 

Ability,  as  measured  by  progressive  rather  than  propor- 
tional taxes,  is  now  the  generally  accepted  principle  for  divid- 
ing the  burden  among  individuals.  Although  progressive 
taxes  are  at  best  a  crude  measure,  they  are  more  nearly  exact 
than  proportional  taxes;  they  at  least  approach  our  present 
conception  of  justice ;  and  they  have  the  additional  advantage 
of  producing  large  revenues.  Consequently  they  are  widely 
favored. 

But  no  such  well-recognized  guiding  principle  has  been 
offered  to  solve  the  other  problem, — that  of  administration 
and  division  of  revenues;  and  it  is  with  the  solution  of  this 
problem  that  separation  in  the  United  States  is  concerned. 
In  practice,  administration  and  use  of  revenues  have  usually 
gone  together,  especially  in  the  United  States,  though  even 
here  there  are  some  notable  exceptions.  But  this  would  not 
seem  to  be  necessary.  The  choice  of  the  administrative 
agent  may  be  determined  primarily  by  administrative  effi- 
ciency,— i.  e.,  the  collections  of  the  various  revenues  may  be 
put  into  the  hands  of  that  authority  best  able  to  collect  them, 
whether  or  not  they  are  to  be  used  by  that  authority.1  Ad- 
ministrative efficiency  is  not  always  dependent  on  use,  nor 
can  it  of  itself  be  accepted  as  justification  for  use.  Use,  or 
division  of  yield,  must  be  determined  by  some  less  tangible 
principle  of  right  or  need.  Consequently  this  problem,  which 
is  the  fundamental  problem  of  separation,  resolves  itself  into 
two  distinct  parts.  These  must  be  solved  separately,  for  the 
most  satisfactory  results  cannot  be  obtained  by  always  com- 
bining administration  and  use  as  under  separation  of 
sources.2 

1  Bastable,  op.  cit.,  p.  393  ct  seq.  2  Ibid.,  p.  404  et  seq. 


!6      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [310 

If  it  be  conceded  that  the  authority  administering  revenues 
need  not  be  the  same  as  the  authority  using  them,  effi- 
ciency would  seem  to  be  the  most  reasonable  standard  for 
determining  the  best  administrative  agent.  And  efficiency 
is  in  fact  the  criterion  which  is  being  widely  accepted, — so 
widely  indeed  that  separation  of  sources  has  been  largely 
determined  on  this  basis,1  while  the  problem  of  deciding 
which  authority  can  best  use  the  proceeds  has  been  made  a 
secondary  consideration.  As  a  result  of  this  and  of  hesita- 
tion to  separate  administration  and  use  there  is  a  tendency 
to  assign  to  the  state  the  proceeds  of  those  sources  which  it 
has  been  found  can  be  better  administered  by  the  state. 
Then  in  order  to  provide  the  localities  with  revenues  they 
have  been  assigned  the  general  property  tax,  as  the  least  ob- 
jectionable tax  for  local  administration.  Whether  local 
administration  of  this  tax  is  more  efficient  than  state  admin- 
istration is  questionable ; 2  but  as  long  as  administration  and 
use  are  combined  it  would  seem  to  be  the  only  feasible 
division. 

This  is  the  foundation  on  which  separation  has  been  based. 
But  it  has  been  further  fortified  by  a  justification — quite  un- 
related to  efficiency — of  the  use  of  revenues  by  those  juris- 
dictions to  which  they  have  been  assigned  from  motives  of 
expediency.  This  justification  is  simply  that  values  should 
be  taxed  only  by  that  government  whose  people  have  created 
them, — that,  to  give  a  specific  instance,  a  few  power  plants 
supplying  electricity  to  an  entire  state  should  be  taxed  by 
that  state,  and  not  by  the  counties  where  the  most  of  their 

1  As  shown  by  the  later  detailed  discussion  it  has  been  the  failure  to 
enforce  the  general  property  tax  which  has  led  to  the  introduction  of 
state-administered  special  taxes  and  to  the  consequent  growth  of  separa- 
tion.    Cf.  also  Report  of  the  Commission  on  Revenue  and  Taxation 
(Sacramento,  1906),  p.  81  ct  seq. 

2  Conference,  1907,  p.  523. 


3  n]  INTRODUCTION  !7 

property  happens  to  exist,  and  whose  people  contribute  little 
or  nothing  to  the  value  of  the  plants. 

In  spite  of  the  fact  that  the  presence  of  corporate  property 
in  a  municipality  often  occasions  considerable  local  ex- 
penditure, this  theory  of  allocation  of  revenues  has  been 
generally  accepted  by  the  advocates  of  separation ; x  not  only 
does  it  seem  reasonable  that  those  who  create  values  have 
the  best  right  to  share  in  them,  but  such  a  division  also  cor- 
responds, at  least  roughly,  to  needs,  since  increases  in  values 
and  in  governmental  expenditures  follow  the  growth  of 
population.  This  division  has  not  been,  and  cannot  be,  ap- 
plied with  great  precision.  Much  of  the  wealth  taxed  by  the 
state  is  created  by  local  conditions;  much  is  of  national  or 
international  origin.  But  although  the  value  of  certain  cor- 
porations may  be  of  distinctly  local  origin  while  that  of 
certain  real  estate,  especially  in  commercial  centers,  may  be 
of  state,  national  or  even  international  derivation,  still  the 
assignment  of  corporate  property  to  the  state,  and  of  other 
property  to  the  localities,  probably  accords  in  the  main  with 
the  division  advocated ;  and  whether  or  not  such  a  division  is 
realized  it  does  improve  the  effectiveness  of  administration, 
and  satisfies  in  large  measure  the  needs  and  claims  of  the 
different  jurisdictions.  This  is  the  justification  of  separa- 
tion as  it  has  been  realized,  and  the  basis  on  which  further 
separation  is  advocated. 

4.    ARGUMENTS  FOR  AND  AGAINST  SEPARATION 

Accepting  these  as  the  underlying  principles  upon  which 
separation  has  been  built,  attention  can  now  be  given  to  the 
specific  advantages  and  disadvantages  advanced  in  support 
of,  or  in  opposition  to.  the  measure.  When  it  was  first  ad- 

1  Seligman,  op.  cit.,  pp.  352-353;  >C.  C.  Plehn,  "Tax  Reform  in  Cali- 
fornia," Conference,  1911,  pp.  116-117;  H.  C.  Adams,  Science  of 
Finance  (New  York,  1899),  pp.  501-502. 


jg      SEPARATION  OF  STATE  AND  LOCAL  REVENUES 

vocated  as  a  definite  financial  reform,  one  of  the  chief  ad- 
vantages attributed  to  it  was  that  it  would  lead  to  home  rule, 
or  local  option,  in  taxation.1  In  fact  it  was  called  a  home- 
rule  measure.  It  was  supposed  that,  since  the  removal  of 
the  state  tax  would  do  away  with  the  necessity  of  uniform 
systems,  the  local  divisions  would  then  be  given  some  free- 
dom to  adapt  their  systems  better  to  their  varying  needs. 
The  liberty  specifically  desired  was  the  liberty  to  exempt 
personalty,  and  in  some  cases  improvements  on  real  estate. 
However,  this  is  no  longer  so  widely  advanced  as  an  argu- 
ment in  favor  of  separation.  Whatever  the  advantages  of 
home  rule,  and  its  value  is  at  least  debatable,  it  is  a  distinct 
issue.2  Separation  opens  the  way, — but  home  rule  need 
not  follow,  and  has  not  followed.  Nowhere  has  it  been 
adopted,  nor  does  the  demand  for  it  seem  to1  be  growing.3 

A  second  argument  advanced  by  the  advocates  of  separa- 
tion combines  the  principles  that  taxes  should  be  adminis- 
tered by  that  agency  which  can  administer  them  most  effi- 
ciently, and  that  the  yield  of  taxes  should  be  assigned  to 

1  Commission  on  Revenue  and  Taxation,  1906,  p.  n;  Conference,  1907, 
P-  495- 

2  Seligman,  op.  cit.,  pp.  367-368. 

3  An  increasing  number  of  local-option  amendments  are  brought  up 
for  consideration  annually  in  various  western  states,  but  their  regular 
defeat  does  not  suggest  that  they  are  growing  in  popularity.     Attempts 
to  obtain  local  option  in  California  since  separation  has  been  introduced 
have  been  uniformly  unsuccessful.     (Cf.  infra,  p.  173).    Limited  local 
option  exists  with  separation  in  Vermont.    Here  localities  have  permis- 
sion to  exempt  the  property  of  mining  and  manufacturing  corporations 
for  ten  years.    (  Cf.  infra,  p.  109) .  Rhode  Island,  without  separation,  gives 
the  localities  the  privilege  of  exempting  certain  property.     (Report  of 
the  Board  of  Tax'  Commissioners,  Rhode  Island,  1913,  p.  41.)    In  Colorado, 
also  without  separation,  Pueblo  exempted  improvements  on  real  estate 
from  local  taxation  by  a  charter  amendment  under  the  general  home- 
rule  powers  granted  to  Colorado  cities,  but  the  amendment  was  re- 
pealed in  1915,     (Y.  Scheftel,  Taxation  of  Land  Value  [Boston,  1916], 
pp.  456-457).    This  is  the  extent  of  local  option  in  the  United  States. 


313]  INTRODUCTION  !9 

that  authority,  the  patronage  of  whose  people  occasions  the 
value  taxed.  This  argument  is  that  separation  is  in  accord 
with  the  natural  division  of  governmental  activities  and  fol- 
lows the  principle  already  laid  down  in  the  separation  of 
national  and  state  revenues.  Some  tax  subjects,  such  as  real 
estate,  are  purely  local  in  character  and  are  more  easily  as- 
sessed by  local  officials,  while  other  subjects,  such  as  in- 
surance companies,  do  a  state  business,  and  can  be  more 
easily  reached  by  the  state.  Great  injustice  often  arises 
from  leaving  corporate  property  to  local  taxation,  for  it  fre- 
quently occurs  that  valuable  property  lies  in  comparatively 
undeveloped  regions,  which  do  not  contribute  appreciably 
to  its  support,  and  do  not  need  the  large  revenues  it  yields.1 

The  remaining  arguments  are  all  in  support  of  the  as- 
sertion that  separation  brings  improved  administration.  In 
the  first  place  it  is  maintained  that  it  removes  the  diversity 
of  interests,  and  consequent  conflicts,  between  city  and 
county,  which  interfere  with  the  enacting  of  good  laws. 
The  counties  are  constantly  complaining  that  they  are  pay- 
ing an  undue  share  of  the  state  tax,  since  a  greater  pro- 
portion of  their  property  than  of  city  property  is  in  tangible 
form.2 

The  argument  most  often  brought  forward  is  that  separ- 
ation will  tend  to  equalize  assessments,  or  at  least  to  elimin- 
ate the  disadvantages  of  inequalities.  Low  and  unequal  as- 
sessments are  prevalent  throughout  the  United  States.  It  is 
not  unusual  for  assessed  valuation  of  real  estate  to  vary 
from  20  to  80  per  cent  in  a  single  state  and  when  personalty 
is  included  even  greater  variations  occur.3  While  many 

1  Cf.  arguments  advanced  in  Seligman,  op.  cit.,  p.  352  et  seq.,  and  in 
Conference,  1915,  p.  51. 

2  Seligman,  op.  cit.,  p.  356. 

3  Reports  of  Minnesota  Tax  Commission,  1908-1912,  passim;  Report 
of  the  Illinois  Tax  Commission  on  the  Tax  System,  1910,  p.  21  et  seq. 


20     SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [314 

causes,  among  them  political  considerations  and  ignorance 
on  the  part  of  assessors,  are  responsible  for  these  inequali- 
ties, it  is  held  that  one  of  the  principal  factors  is  the  state 
tax  on  general  property  apportioned  according  to  assessed 
valuation.  So  long  as  the  taxpayers  of  a  county  where 
property  is  assessed  at  fifty  per  cent  of  real  value  have  to 
pay  in  state  taxes  only  half  as  much,  relatively,  as  the  tax- 
payers of  a  county  where  property  is  assessed  at  full  value, 
there  will  always  be  a  tendency  among  the  counties  to  com- 
pete in  undervaluing  their  property.  The  removal  of  the 
state  tax  will  eliminate  this  incentive  to  undervaluation, 
and  the  local  assessors,  it  is  claimed,  will  then  raise  their 
ratio  to  approximately  full  value, — particularly  as  a  high 
assessment  will  permit  of  a  low  tax  rate,  a  consideration  in. 
local  advertising.  And  even  if  this  should  not  occur,  with 
no  state  tax  the  principal  objection  to  inequalities  is  removed. 
This  abolishes  the  need  of  state  equalization,  which  has 
never  been  very  successful.1 

It  is  further  claimed  by  proponents  of  the  measure  that 
the  redistribution  of  the  tax  will  equalize  the  burden  as  be- 
tween different  kinds  of  property.2  A  partial  shifting  of  the 
tax  from  real  estate  to  intangible  property  will  result — the 
state  corporation  tax  reaching  intangibles  more  success- 
fully 3 — and  greater  equality  will  thus  be  attained,  since  real 
estate  is  paying  more  under  the  general  property  tax  than 
other  property. 

Objections  to  all  of  these  arguments  are  advanced  by 

1  Seligman,  op.  cit.,  p.  22.    Professor  T.  S.  Adams,  however,  believes 
that  equalization  has  not  yet  been  given  a  fair  trial,  and  that  under  in- 
telligent  and   centralized   control   it   would   prove   entirely   successful. 
(Cf.  discussions  in  Conference,  1907,  p.  527,  and  Annals  of  the  American 
Academy  of  Political  and  Social  Science,  vol.  Iviii,  pp.  138-139). 

2  Commission  on  Revenue  and  Taxation,  1906,  pp.  79-80. 

3  State  corporation  taxation  is  an  essential  feature  of  all  schemes  of 
separation  thus  far  adopted. 


315]  INTRODUCTION  21 

opponents  of  separation.1  Considering  home  rule  first,  they 
agree  that  it  is  encouraged  by  separation,  but  they  consider 
it  to  be  undesirable.  However,  home  rule,  as  indicated 
above,2  is  a  distinct  problem,  and  whatever  its  advantages 
or  disadvantages  it  need  not  be  considered  here. 

Concerning  the  conformity  of  this  system  to  the  natural 
divisions  of  governmental  activities  the  opponents  object, 
with  reason,  that  there  is  no  necessary  relation  between  the 
two;  that  control  should  be  determined  by  convenience  and 
efficiency  of  administration,  taxation  by  fiscal  needs,  and 
owing  to  the  united  'political  and  social  organization  of  the 
state  and  local  divisions  these  needs  can  be  better  satisfied  by 
a  unified  revenue  system.3 

With  regard,  further,  to  the  relation  of  revenues  to  needs 
under  separation,  it  is  claimed  by  opponents  that  it  takes 
away  from  the  cities  their  great  source  of  revenue;  conse- 
quently the  burden  probably  falls  most  heavily  on  them, 
and  they  are  already  overburdened  with  municipal  taxes, 
for  city  expenditures  are  rising  more  rapidly  than  any 
other.  Quoting  Professor  T.  S.  Adams: 

What  separation  actually  does  is  to  substitute  for  a  conscious 
distribution  of  state  burdens  in  accordance  with  the  value  of 
property,  an  unconscious,  unseen,  and  more  or  less  haphazard 
distribution,  which  shifts  the  burden  we  know  not  where, 
avoids  the  evils  of  faulty  equalization  according  to  property 
by  flying  to  other  ills  we  know  not  of.4 

Professor  Adams  further  says 

1  See  discussions  by  Professor  T.  S.  Adams  (Conference,  1907,  p.  515 
et  seq.},  by  Professor  C.  J.  Bullock  (Quarterly  Journal  of  Economics, 
vol.  xxiv,  p.  437  et  seq.,}  and  Professor  J.  E.  Brindley,  ("  Problem  of 
Tax  Reform  in  Iowa,"  Conference,  1910,  p.  155). 

2  Cf.  supra,  p.  18.  8  Conference,  1910,  p.  156. 
4  Conference,  1907,  p.  523. 


22      SEPARATION  OF  STATE  AND  LOCAL  REVENUES 

Unless  the  presence  of  property  at  a  place  has  no  connection 
with  public  expenditure  of  that  place,  unless  the  right  to 
exploit  the  commercial  opportunities  of  a  place  creates  no 
obligation  to  pay  taxes  at  that  place,  .  .  .  then  street  car  com- 
panies, heating  and  lighting  plants,  most  banks,  and  some  tel- 
ephone companies  owe  most  of  their  fiscal  allegiance  to  fairly 
well  defined  local  districts,  and  when  these  local  districts  are 
deprived  by  the  state  of  the  power  of  taxing  such  corporations 
they  are  saddled  with  burdens  of  state  taxation  which  belong 
elsewhere.1 

Diversity  of  interest,  it  is  maintained,  will  not  be  removed. 
The  burden  must  fall  somewhere,  and  it  will  result  in  oppos- 
ing the  interests  of  city  and  rural,  of  manufacturing  and 
residence  districts.2 

Concerning  the  equalization  of  assessments  the  opponents 
argue  that  the  desire  to  avoid  state  taxes  is  a  minor  cause  of 
undervaluation,  the  state  tax  being  always  a  small  propor- 
tion of  the  total.3  To  obtain  fair  valuations  requires  ex- 
pert treatment  which  only  the  central  government  can  give. 

1  Conference,  1907,  p.  525. 

2  Quarterly  Journal  of  Economics,  vol.  xxiv,  p.  449. 

3  Though  the  state  tax  amounted  only  to  n.6  per  cent  of  the  total 
property  tax  in  the  United  States  in  1902  it  is  not  on  that  account  a 
negligible    factor.      As    Professor   Seligman  points   out    (op.    cit.,   pp. 
355-356)    the    proportion    of    state    to    county    expenditure    is    larger 
than  the  proportion  of  county  to  town  expenditure.    The  ratio  for  the 
general  property  tax,  with  which  alone  assessments  are  concerned,  was, 
1913,  49.1  per  cent  (state  to  county)   as  compared  with  42.6  per  cent 
(county  to  town).     In  the  less  developed  states  this  ratio  is  reversed, 
(46  per  cent  as  compared  with  283  per  cent  in  Arizona,   1913),  and 
even  in  California  before  separation  the  proportion  of  county  to  town 
revenues  from  general  property  greatly  exceeded  the  proportion  of  state 
to  county.    However,  in  the  more  developed  states,  comprising  most 
of  those  considering  separation,  the  proportion  of  state  to  county  taxes 
is  by  far  larger,  even  where  separation  exists  in  a  measurable  degree. 
(Computed  from  data  in  Census  Report,  Wealth,  Debt  and  Taxation, 
1913,  vol.  ii.) 


317]  INTRODUCTION  23 

Unequal  assessments  are  due  rather  to  the  inherent  difficul- 
ties of  the  task,  political  pressure,  personal  considerations, 
insufficient  time  and  pay  given  to  the  assessors,  and  the  de- 
sire to  evade  the  county  tax.  The  need  of  equalization 
remains. 

In  addition  to  these  objections  it  is  argued  that  separation 
leads  to  wastefulness.  Lack  of  a  direct  tax  prevents  the 
people  from  feeling  the  burden.1  Counties  and  municipali- 
ties will  urge  state  expenditure  because  the  burden  falls  on 
corporations,  and  corporations  will  urge  county  and  muni- 
cipal expenditure  to  retaliate,  and  because  of  benefits  ac- 
cruing.2 The  result  is  extravagance.  People  in  general 
lose  interest,  and  corporations  are  forced  into  politics. 

Finally  the  opponents  of  separation  contend  that  it  will 
give  no  elastic  state  tax,  and  will  lead  either  to  insufficient 
state  revenue  or  insufficient  local  revenues.3  The  propon- 
ents of  the  measure,  however,  argue  that  state  revenue  may 
be  supplemented,  if  necessary,  by  a  tax  apportioned  accord- 
ing to  local  expenditure,  although  the  possibilities  of  special 
taxes  are  by  no  means  exhausted,  the  desired  elasticity  may 
be  obtained  by  making  variable  one  tax,  e.  g.  the  inheritance 
tax,  by  the  accumulation  of  a  surplus,  or  by  the  use 
of  apportionment  by  expenditure;  and  local  revenue  may 
be  increased  by  the  division  of  the  state  surplus.4 

Separation,  as  has  been  said,5  is  not  in  itself  a  reform,  but 
opens  the  way  to  reform.  It  makes  possible  more  efficient 
administration,  and  reaches  sources  which  escape  under  the 
general  property  tax.  The  end  sought  is  improved  adminis- 
tration and  increased  revenues  through  the  abolition  of  the 

1  Quarterly  Journal  of  Economics,  vol.  xxiv,  p.  454. 

2  Report  of  the  State  Tax  Commission  of  Arizona,  1912,  p.  25, 

3  Quarterly  Journal  of  Economics,  vol.  xxiv,  p.  453. 

4  Seligman,  op.  cit.,  p.  358  et  seq.  5  Supra,  p.  u. 


24      SEPARATION  OF  STATE  AND  LOCAL  REVENUES 

state  general  property  tax  and  the  substitution  of  more  just 
and  effective  special  taxes.  All  alike  agree  that  improved 
administration  is  desirable,  but  the  opponents  of  separation 
believe  that  this  is  not  the  way  to  obtain  it.  They  offer  in- 
stead apportionment  by  expenditure,1  or  centralized  admin- 
istration without  reference  to  separation.2 

5.   SEPARATION   IN   FOREIGN   COUNTRIES 

Although  separation  has  arisen  in  the  United  States  only 
in  dealing  with  the  problem  of  the  general  property  tax  it 
has  been  introduced  into  other  countries  for  other  reasons. 
France  and  Belgium,  to  be  sure,  cling  to  a  unified  system  in 
which  local  taxes  are  derived  from  the  same  sources  as  cen- 
tral taxes,3  and  subventions  are  largely  resorted  to, — the 
whole  system  being  highly  centralized.4  In  England,  how- 
ever, although  administration  is  closely  controlled  by  the 
central  authorities,  the  national  and  local  governments  have 
no  taxes  in  common  except  the  probate  duty  which 
is  administered  by  the  central  government  and  returned 
in  part  to  the  localities.  The  national  government  levies 
taxes  on  incomes,  on  some  forms  of  personalty,  and, 
since  1910,  on  land.  The  localities  are  supported  by  local 
rates  on  real  estate  (quite  distinct  from  the  national  land 
taxes),  certain  licenses  and  subventions.  Although  the  na- 
tional and  local  authorities  share  none  of  their  taxes  (with 
the  one  exception  named),  this  system  involves  very  little 
separation  of  source.5  In  Switzerland,  where  the  general 
property  tax  is  still  widely  used,  the  local  tax  systems  are 

1  Conference,  1911,  p.  253  et  seq.  2  Conference,  1907,  p.  526. 

8  The  changes  made  in  the  land  tax  in  France,  1914,  have  not  inter- 
fered with  its  use  as  both  a  central  and  local  tax.  The  new  income 
tax  (1914),  however,  is,  as  yet,  used  only  for  central  purposes.  (Jour- 
nal des  Economistes,  6  ser.,  tome  49,  1916,  p.  277  et  seq.) 

4  Grice,  J.  W.,  National  and  Local  Finance  (1910),  ch.  vii-xiv. 

5  Ibid.,  chs.  ii-vi ;  see  also  Seligman,  op.  cit.,  p.  482  et  seq. 


319]  INTRODUCTION  2$ 

for  the  most  part  combined  with  those  of  the  cantons,  the 
local  taxes  being  in  the  form  of  additions  to  the  canton 
taxes.  In  the  French  cantons  the  tendency  is  toward  highly 
centralized  administration  like  that  of  France,  but  in  the 
German  cantons  a  considerable  degree  of  local  autonomy  in 
administration  is  granted.  There  is,  however,  no  appreci- 
able degree  of  separation.1 

In  Prussia,  and  to  a  considerable  extent  throughout  Ger- 
many, fairly  complete  separation  exists.  The  fiscal  system 
of  Prussia  was  revolutionized  by  several  laws  passed  in  1893 
and  put  into  effect  in  1895.  The  principle  underlying  the 
reform  was  that,  owing  to  the  difference  in  the  relations  of 
the  citizens  to  the  state  and  to  the  town,  state  taxes  should 
be  levied  according  to  ability,  and  local  taxes  according  to 
benefit.  Consequently  it  was  provided  that  the  state  income 
tax,  already  in  use,  should  be  supplemented  by  a  property 
tax,  and  the  land,  building  and  business  taxes  should  be 
abolished  as  state  taxes.  Local  revenue  was  to  be  derived 
mainly  from  fees  and  special  assessments,  and  direct  taxes 
on  real  estate  and  business.  Limited  use  of  indirect  taxes 
and  of  a  local  income  tax  was  also  permitted.  While  these 
laws  have  developed  a  number  of  defects  2  they  seem,  as  a 

1  F.  Ott,  Die  Vermogens-  und  Einkommens-Steuer  in  der  Schweiz 
(Zurich,  1914),  passim. 

2  This  system  (which  exists  in  a  number  of  states)  is  severely  criti- 
cized by  Dr.  Schanz.    Separation  has  resulted  in  higher  taxes  on  real 
estate  than  on  other  wealth — in  some  cases  the  ratio  is  five  to  three — 
which,  he  argues,  is  indefensible,  since  the  owners  of  real  estate  are  no 
more  benefited  by  local  expenditure  than  the  owners  of  other  wealth. 
He  believes  that  local  taxes,  like  state  taxes,  should  be  in  accordance 
with  ability,  since  state  and  local  functions  are  much  the  same,  and  in 
so  far  as  the  different  jurisdictions  perform  the  same  sort  of  services 
they  should  obtain  their  revenues  in  the  safne  way.     (Finanz-Archiv, 
32  Jhrg.,  p.  54  et  seq.)    This  criticism  does  not  apply  to  separation  in 
the  United  States.   No  general  attempt  has  been  made  to  levy  local  taxes 
in  accordance  with  benefit  and  one  of  the  chief  aims  of  separation  has 
been  to  reduce  the  burden  on  real  estate. 


26      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [320 

whole,  to  have  proved  satisfactory,  and  the  resulting  separa- 
tion of  the  state  and  local  revenues  is  generally  considered 
to  be  a  great  advance  over  the  former  system.1 

Canada  has  developed  a  satisfactory  system  of  taxation 
wherein  complete  separation  of  provincial  and  local  revenues 
exists  in  all  of  the  nine  provinces.  By  the  British  North 
American  Act  of  1867  the  federal  government  retained  all 
of  the  customs  duties  and  excises,  and  the  provinces  were 
restricted  to  licenses  and  direct  taxes.  The  former  were 
small  and  the  latter  were  entirely  in  the  hands  of  the  muni- 
cipalities. Consequently,  in  order  that  the  provinces  might 
not  be  embarrassed  by  insufficient  revenues  the  act  pro- 
vided further  that  the  federal  government  should  assume 
the  provincial  debt,  and  grant  to  the  provinces  specific  sub- 
sidies, and  in  addition  the  revenue  from  the  crown  lands  or 
an  indemnity  in  place  of  it.  The  revenues  collected  by  the 
provinces  themselves  arise,  for  the  most  part,  from  corpora- 
tion taxes,  licenses  and  fees.  The  municipalities  obtain 
their  revenue  mainly  from  direct  taxes  on  property  and 
business.2 

6.    SEPARATION  IN  THE  UNITED  STATES 

During  the  colonial  period  and  in  the  early  history  of 
our  states,  the  general  property  tax,  outside  of  New  Eng- 
land, was  not  widely  used,  except  as  a  local  tax.  Many  of 
the  colonists  were  unaccustomed  to  such  a  tax,  and  the  slight 
need  of  revenues  and  the  existence  of  other  large  sources 
which  later  disappeared  made  its  use  unnecessary.  Before 
the  Revolution  the  import  duties  formed  an  important  source 
of  revenue,  and  later,  when  these  were  taken  from  the 

1  Seligman,  op.  cit.,  p.  437  et  seq. 

2  S.  Vineberg,  "  Provincial  and  Local  Taxation  in  Canada,"  Columbia 
University  Studies  in  History,  Economics  and  Public  Law,  1912,  vol. 
Hi,  PP.  153-156. 


321]  INTRODUCTION  27 

states,  large  revenues  were  obtained  from  licenses,  lotteries, 
state  investments,  and  the  sale  of  public  lands.1 

Direct  taxes  were  early  used  to  a  limited  extent,  but  these 
took  the  form  of  taxes  on  specific  subjects  rather  than  all 
property,  and  assessments  were  made  on  arbitrary  values  in- 
stead of  on  selling  values.2  These  taxes  were  first  com- 
bined into  a  general  property  tax  in  the  New  England  States 
during  the  early  nineteenth  century.  The  Middle  Western 
States  followed, — making  the  general  property  tax  the  cen- 
tral tax  of  their  fiscal  systems  as  they  entered  the  Union. 
During  the  era  of  internal  improvements — the  second  quar- 
ter of  the  century — the  Middle  Atlantic  States  were  forced 
to  resort  to  this  tax,  and  the  Southern  States  followed 
shortly  afterward.3  In  the  North  and  West  the  tax  was 
readily  accepted,  but  the  Southern  States  endeavored,  with 
some  success,  to  check  its  growth  by  developing  business 
license  taxes,  and  the  Middle  Atlantic  States  only  turned 
to  it  when  their  reckless,  and  for  the  most  part  unsuccessful, 
policy  of  state  aid  to  internal  improvements  forced  them  to 
obtain  larger  revenues.  However,  the  general  property  tax 
was  so  generally  accepted,  when  it  was  finally  introduced, 
that  only  in  Delaware  and  Pennsylvania  has  it  never  become 
an  important  state  tax;  yet  owing  to  the  earlier  absence  of 
such  a  tax  in  many  states,  and  the  large  dependence  on  in- 
direct sources  in  others,  separation,  partial  or  complete, 
existed  in  most  of  the  states  until  nearly  1850.* 

The  separation  thus  existing  was  not,  however,  adopted 

1  R.  T.  Ely,  Taxation  in  American  States  and  Cities   (New  York, 
1888),  bk.  ii,  chs.  i-ii;  J.  H.  Hollander,  ed.,  "Studies  in  Taxation," 
Johns  Hopkins  University  Studies,  iios.  1-4,  1900;  for  systems  of  states 
discussed  in  this  monograph,  cf.  infra,  passim. 

2  Ely,  op.  tit.,  p.  132.  3  Seligman,  op.  cit.,  pp.  16-17. 
*  Ely,  op.  cit.,  passim ;  Hollander,  op.  cit.,  passim. 


28      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [332 

consciously  as  a  desirable  fiscal  principle.  The  property 
tax,  which  was  a  burden  to  all,  was  unpopular  in  many  of  the 
states,  and  for  the  most  part  there  was  no  difficulty  in 
obtaining  sufficient  revenues  without  it.  When  greater 
revenues  were  needed  the  direct  tax  was  resorted  to  for  state 
and  local  purposes,  as  the  simplest  means  of  supplying  the 
growing  needs.  The  new  system  abolished  separation,  and 
no  attempt  was  made  to  retain  it.  It  was  believed  by  some 1 
that  the  direct  tax  would  check  extravagance,  but  the  con- 
tinued large  expenditures  in  New  York  after  the  introduc- 
tion of  the  direct  tax,  and  the  reckless  investments  of  Massa- 
chusetts, and  later  Michigan,  where  the  general  property  tax 
was  well  established,2  do  not  suggest  that  the  absence  of  a 
direct  tax  was  the  main  cause  of  extravagance.  Separation 
was  abandoned  unconsciously,  as  it  had  been  employed  un- 
consciously, with  no  intelligent  consideration  of  its  desir- 
ability or  undesirability.  It  was  not  even  thought  of,  ap- 
parently, as  a  definite  fiscal  principle.  In  the  attempt  to 
meet  growing  expenditures  the  state  tax  on  property  was 
rapidly  developed,  and  during  the  third  quarter  of  the  nine- 
teenth century  it  became  practically  universal. 

With  the  paying  off  of  the  state  debts  incurred  during 
the  Civil  War  taxation  again  became  very  burdensome ;  and 
the  agitation  arising  in  the  attempt  to  lighten  this  burden 
brought  with  it  the  realization  that  the  general  property  tax, 
introduced  to  meet  the  earlier  need,  was  inadequate  for  this 
new  and  greater  demand.  With  changing  conditions  the 
tax  was  proving  defective.  Corporations  were  rapidly  in- 
creasing, and  with  them  intangibles,  which  the  general  prop- 
erty tax  failed  in  large  part  to  reach.  During  the  last 
quarter  of  the  nineteenth  century  the  emphasis  was  shifting 

1  E.  g.,  Report  of  the  Comptroller,  New  York,  1844,  p.  76. 

2  Cf.  reports  of  financial  officials  of  these  states. 


323]  INTRODUCTION  29 

from  property  to  the  income  from  property,  the  growth  of 
corporations  being  probably  largely  responsible  for  this  also ; 
for  investments  in  stocks  and  bonds  were  increasing,  and 
property  consisted  more  and  more  of  rights  to  the  income 
from  wealth  rather  than  the  concrete  items  of  wealth  them- 
selves. Further,  the  government  was  restricting  the  rights 
of  private  property.1  This  change  soon  manifested  itself  in 
the  field  of  taxation.  On  the  one  hand,  to  tax  property, 
valuable  because  of  the  expected  future  yield  of  income, 
though  yielding  little  or  nothing  at  the  time  of  taxation,  was 
obviously  a  hardship.  On  the  other  hand,  the  failure  to 
reach  large  incomes  arising  from  intangible  wealth  (such  as 
is  now  designated  as  corporate  excess,  good  will  or  fran- 
chise value)  caused  gross  inequalities,  which  were  felt  to 
be  even  more  flagrant  as  the  principle  of  progressive  taxa- 
tion, the  logical  development  of  the  faculty  theory,  grew. 
Inequalities  of  assessment  of  all  forms  of  property  only 
added  to  the  difficulties. 

Persistent  but  unsuccessful  efforts  were  made  to  enforce 
the  general  property  tax  as  it  stood.  Almost  equally  in- 
effective attempts  were  made  to  devise  new  taxes  to  reach 
personalty.  Then  the  plan  of  classifying  property  was 
tried,  different  methods  of  taxation  being  applied  to  the 
different  classes.  Under  this  system  it  was  found  that  cer- 
tain taxes  could  be  satisfactorily  administered  only  under 
central  control,  and  it  naturally  followed,  in  many  cases, 
that  the  state  appropriated  for  its  own  use  the  revenue  from 
such  taxes  as  it  administered,  and  relinquished  to  the  local- 
ities as  compensation  other  taxes,  which  they  were  more  cap- 
able of  handling.  This  process,  distinguishable  nearly  half 
a  century  ago,  is  still  going  on  today.  In  this  way  the 
separation  of  state  and  local  revenues  has  again  arisen  un- 

1  Principally  through  the  regulation  of  corporations. 


30      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [324 

consciously,  and  it  has  been — and  still  is  in  many  places — 
growing  in  this  way,  an  incidental  result  of  other  changes. 
Consequently  all  states  obtain  a  part  of  their  revenue  under 
the  principle  of  separation. 

Along  with  its  incidental  growth,  however,  separation  has 
been  advanced  as  a  definite  reform, — and  this  advocacy  of 
separation,  as  in  itself  a  step  forward,  has  unquestionably 
been  an  important  factor  in  the  attainment  of  separation  in 
such  states  as  New  York,  where  the  movement  was  initiated 
through  classification;  and  in  one  state,  California,  separa- 
tion was  adopted  as  a  conscious  reform  without  any  pre- 
liminary development  of  special  taxes. 


CHAPTER  II 
SEPARATION  IN  DELAWARE 

COMPLETE  separation  of  revenues  exists  in  Delaware, 
not  as  the  outcome  of  slow,  planless  development  in  the 
struggle  to  increase  revenues,  or  as  the  result  of  a  con- 
scious effort  to  equalize  burdens,  but  as  a  survival  of  the 
widespread  system  existing  in  this  country  in  the  early  nine- 
teenth century,  before  the  general  property  tax  had  grown 
to  its  present  supremacy. 

License  taxes  and  revenues  from  investments  have  sup- 
plied the  state  with  considerable  income, — although  decreas- 
ing in  importance, — and  for  a  time  before  1800  the  general 
income  tax  was  used,  and  later  a  poll  tax.1  The  general 
property  tax  was  employed  only  occasionally,  and  for  brief 
periods, — first  from  1798  to  1804,  again  from  1814  to  1819, 
then  in  1833,  and  finally  from  1869  to  i877.2  The  failure 
to  establish  the  general  property  tax  is  due  to  the  control  of 
the  legislature  by  agricultural  interests  and  to  the  relatively 
small  need  of  revenues.  While  per  capita  wealth  is  com- 
paratively small  ($1,493  m  I9I3  as  compared  to  $1,965,  the 
average  for  the  United  States)  so  also  is  per  capita  state 
expenditure  ($3.15  in  1913  as  compared  with  $3.95,  the 
average  for  the  United  States).3  Moreover  the  state  has 
profited  by  revenues  from  the  corporations  which  it  has 
encouraged  to  incorporate  there.  A  large  debt  has  never 

1  Ely,  op.  cit.,  p.  122. 

2  Report  of  the  State  Revenue  and  Taxation  Commission  (Delaware, 
1909),  P.  45- 

3  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  26 ;  vol.  ii,  p.  40. 

325]  31 


32      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [326 

accumulated  and  the  problem  of  taxation  has  never  become 
acute. 

The  question  of  revenues  has  been  further  simplified  by 
the  fact  that  the  constitution  permits  classification.  This 
has  made  it  possible  to  introduce  special  corporation  taxes. 
In  1820  a  tax  was  imposed  on  the  capital  stock  of  banks.1 
This  tax  was  extended  to  national  banks  in  1866,  and  the 
rate  was  reduced  in  1869.  At  present  certain  banks  pay 
one-fourth  of  one  per  cent  on  paid-up  capital.  Others  pay 
one-fifth  of  one  per  cent  on  capital  stock,  surplus  and  un- 
divided profits,  and  are  exempt  from  all  other  taxes.2  A 
passenger  tax  was  placed  on  steamboats  in  1821,  and  on 
stage  coaches  in  i829.3  Railroads,  however,  were  not  taxed 
until  1864.  The  Delaware  Railroad,  chartered  in  1836,  had 
been  granted  a  fifty-year  exemption,  but  in  1864  a  passenger 
tax  was  placed  on  all  transportation  companies.  Five  years 
later  railroads  were  subjected,  in  addition,  to  a  number  of 
special  taxes,  on  net  earnings,  capital  stock,  locomotives,  pas- 
senger cars  and  freight  cars.  This  complex  system  was 
suspended  in  1873, — the  various  taxes  being  commuted  for 
lump  sums  determined  by  the  legislature.4  This,  except  for 
changes  in  the  amount  of  the  lump  sums  due,  is  the  method 
of  taxation  used  today. 

Insurance  companies  were  first  taxed  in  1869.  At  present 
life-insurance  companies  pay  two  per  cent  on  general  prop- 
erty less  return  premiums  and  reinsurance.  Other  com- 
panies pay  one  and  one-half  per  cent  on  gross  premiums, 
except  domestic  fire  insurance  companies  which  pay  $100 
annually.  Life  insurance  companies  pay  in  addition  a 
franchise  tax  of  three-tenths  of  one  per  cent  on  gross 

1  Revenue  and  Taxation  Commission,  1909,  p.  65  et  seq. 

2  Wealth,  Debt  and  Taxation,  vol.  i,  p.  491. 

3  Revenue  and  Taxation  Commission,  1909,  p.  21  et  seq. 

4  Ibid.,  p.  22. 


327]  SEPARATION  IN  DELAWARE  33 

premiums  and  three- fourths  of  one  per  cent  on  surplus. 
Other  insurance  companies  pay  a  franchise  tax  of  three- 
fourths  of  one  per  cent  on  gross  premiums.1 

Telegraph  and  telephone  companies  pay  20  cents  to  60 
cents  per  mile  of  wire,  and  telephone  companies  pay  in  addi- 
tion 25  cents  per  transmitter.  Both  also  pay  a  franchise  tax 
of  one  per  cent  on  gross  receipts  within  the  state. 

Express  companies  pay  six  per  cent  on  gross  earnings  of 
interstate  business  plus  $250  license  fees.  They  also  pay  a 
franchise  tax  of  one  per  cent  on  gross  earnings.  Steam,  gas 
and  electric  companies  pay  one  mill  on  gross  receipts ;  also  a 
franchise  tax  on  gross  receipts  of  two-fifths  of  one  per  cent, 
which,  in  the  case  of  companies  with  dividends  in  excess  of 
four  per  cent,  is  in  addition  to  a  tax  of  four  per  cent  on 
such  excess  dividends.  Pipe  lines  pay  a  franchise  tax  of 
three-fifths  of  one  per  cent  and  parlor  car  companies  pay 
one  of  one  and  one-half  per  cent  on  gross  earnings. 

All  mercantile,  manufacturing  and  miscellaneous  corpor- 
ations doing  less  than  fifty  per  cent  of  their  business  in  the 
state  are  subject  to  a  tax  which  runs  from  $5  on  capital 
of  $25,000  or  under  to  $25  per  $500,000  on  capital  of 
$1,000,000  and  over.  These  companies  are  subject  also 
to  various  license  taxes,  some  of  which  were  so  reduced  in 
1907,  at  the  instance  of  the  manufacturers  paying  them,  that 
the  state  has  suffered  a  serious  loss  of  revenues. 

Finally  all  corporations  are  subject,  upon  incorporation, 
to  the  charter  mill  tax  of  ten  cents  per  $1,000  capital, 
with  a  minimum  of  $10.  This  is  the  largest  single  source 
of  revenue  in  the  state. 

Such  is  the  system  of  corporation  taxation  in  Delaware. 
Expediency,  apparently,  has  been  the  sole  guide.  Almost 
every  conceivable  base  has  been  experimented  with,  and  in 

1  For  a  complete  account  of  the  present  revenue  system  see  Wealth,. 
Debt  and  Taxation,  1913,  vol.  i,  p.  491. 


34      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [328 

consequence  there  are  rather  serious  inequalities.  But  the 
taxes  have  not  been  heavy  and  the  system  has  produced 
revenues  ample  for  the  state's  needs. 

An  inheritance  tax,  first  imposed  in  1869,  yielded  in  1915 
approximately  1.5  per  cent  of  all  revenue.1  It  is  a  col- 
lateral tax  of  one  to  five  per  cent  graded  according  to  rela- 
tionship, on  all  estates  over  $500.  The  return  from  state 
investments  yields  about  the  same  amount.  There  are  no 
other  important  sources  of  state  revenue,  aside  from  the  cor- 
poration taxes  already  mentioned,  and  licenses. 

There  has  been  a  steady,  but  not  large,  increase  in  rev- 
enues. Revenues  of  the  general  fund  increased  61  per  cent 
in  the  twenty  years  from  1873  to  1893,  and  123  per  cent  in 
the  twenty  years  from  1893  to  191 3. 2  Revenues  are  rising 
more  rapidly  than  this  in  over  half  of  the  states.3  The  rev- 
enues of  the  general  fund  in  1915  were  $810,300.  They 
were  distributed  as  follows : 

TABLE  I 

REVENUES  OF  THE  GENERAL  FUND,  1915* 
Source  Amount  Percentage 

Railroads $112,000  13.8 

Telegraph  and  telephone   14,400  1.7 

Express 2,500  0.3 

Franchise  tax 96,700  11.9 

Incorporation  fees 1 1 7,400  14.5 

Bank  and  insurance 73>4°°  9-O 

Licenses 156,900  19.3 

Inheritance  tax 11,100  1.4 

Dividends 11,900  1.5 

Other 214,000  26.6 

Total 810,300  100.0 

1  Computed  from  data  in  Annual  Report  of  the  State  Treasurer  of 
Delaware,  1915. 

2  Computed  from  data  in  Auditor's  Report  for  1873  and  Treasurer's 
Report  for  1893  and  1913. 

8  Wealth,  Debt  and  Taxation,  1913,  vol.  ii,  pp.  36-39. 

4  Compiled  from  data  in  Report  of  State  Treasurer,  1915. 


329]  SEPARATION  IN  DELAWARE  35 

The  local  divisions  depend  almost  entirely  on  the  general 
property  tax.  In  1913,  72  per  cent  of  local  revenue  receipts 
came  from  this  source.1  This  tax  has  a  wide  base  since 
the  only  property  reserved  for  state  taxation  is  the  railway 
right  of  way.  In  consequence  it  is  not  especially  burden- 
some and  the  localities  have  no  difficulty  in  obtaining  ample 
revenue. 

The  average  tax  rate  in  1912  was  $1.91  per  $100  assessed 
value.  This  makes  the  rate  on  actual  value  of  real  estate 
$1.02,  if  the  rate  of  assessed  to  true  value  in  the  census 
report 2  may  be  accepted.  This  is  not  a  high  rate. 

There  has  been  but  little  centralization  of  the  adminis- 
tration of  local  taxes.3  One  assessor  is  elected  for  each 
"  hundred  "  4  and  it  is  his  duty  to  assess  the  property  of 
corporations  as  well  as  of  natural  persons.  The  only  equali- 
zation obtained  is  through  the  board  of  revision  of  assess- 
ment of  each  district,  which  is  composed  of  the  assessor  and 
two  citizens  appointed  by  the  levy  court.  The  functions  of 
this  board  are  to  supervise  and  equalize  assessments.  There 
is  no  equalization  between  counties.5 

All  state  revenues  are  collected  by  the  treasurer,  except 
certain  licenses  which  are  collected  by  the  clerks  of  the  peace. 
A  collector  appointed  by  the  governor  investigates  state- 
ments of  taxable  property  filed  with  clerks  of  the  peace. 

This  system  is  fairly  satisfactory,  largely  owing  to  the 
fact  that  the  demands  on  it  are  light.  It  has  never  been 
called  upon  to  meet  the  test  of  heavy  expenditures.  Conse- 
quently it  is  of  little  significance  in  the  study  of  separation 

1  Compiled  from  data  in  Wealth,  Debt  and  Taxation,  1913,  vol.  ii. 

2  Ibid.,  vol.  i,  p.  16. 

3  Ibid.,  vol.  i,  pp.  489-493. 

4  The  local  unit  of  assessment. 

5  Wealth,  Debt  and  Taxation,  vol.  i,  p.  492. 


36      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [330 

of  sources  of  revenues.  It  is  in  the  more  highly  developed 
states,  where  the  enormous  growth  of  expenditures  has  made 
development  of  revenues  an  exceedingly  difficult  and  serious 
problem,  that  the  advantages  and  limitations  of  separation 
can  best  be  judged.  And  it  is  in  these  states,  where  the 
greatest  strain  has  been  put  upon  financial  systems,  that 
separation  has  been  most  often  introduced. 


CHAPTER  III 

SEPARATION  IN  PENNSYLVANIA 

I.  HISTORY  OF  TAXATION  IN  PENNSYLVANIA 

PENNSYLVANIA'S  experiments  with  special  taxes  led  her 
early  to  fairly  successful  taxation  of  intangibles.1  As  a  re- 
sult this  state,  like  Delaware,  has  never  depended  long  on 
the  general  property  tax  for  state  revenues,  although  for  a 
few  years  it  became  the  principal  source  of  revenue. 

A  state  direct  tax  was  first  levied  in  1785,  but  being 
found  to  be  both  unsuccessful  and  unnecessary  it  was  dis- 
continued in  1 789.  The  receipts  from  the  sale  of  public  lands 
and  the  interest  on  state  investments  supplied  the  larger 
part  of  state  revenues  for  many  years.  These  sources 
yielded  26.4  per  cent  and  36.2  per  cent,  respectively,  of  all 
state  revenues  in  1810  as  compared  with  23.6  per  cent  from 
taxes — which  were  mostly  license  taxes.2 

Specified  classes  of  personal  property  were  first  taxed  by 
the  state  in  1831,  at  the  rate  of  one  mill.  In  addition  a 
one-mill  state  tax  was  added  to  all  real  and  personal  prop- 
erty taxed  locally.  These  realty  and  personalty  taxes  were 
levied  for  only  five  years,  it  being  confidently  expected  that 
the  income  from  canals,  railroads  and  other  public  works, 
whose  cost  of  construction  was  the  occasion  of  the  levy, 
would  soon  be  sufficient  to  support  the  state.8  They  were 

1  Infra,  p.  38  et  seq.  2  Ely,  op.  cit.,  p.  45. 

3T.  K.  Worthington,  "Historical  Sketch  of  the  Finances  of  Penn- 
sylvania." American  Economic  Association  Publications,  vol.  ii,  no.  2, 
p.  38  (1887). 

33i]  37 


38      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [332 

consequently  given  up  in  1836.  Money  received  from  the 
federal  government  through  the  distribution  of  the  surplus 
in  1837,  and  through  the  United  States  Bank  rechartered  by 
the  Pennsylvania  legislature,  sufficed  the  state  until  I84O.1 
But  the  canals  and  railroads,  failed  to  yield  the  returns  an- 
ticipated, and  the  debt  became  so  large  that  it  was  found 
necessary  to  take  definite  action  in  this  year.  A  law  was 
enacted  imposing  taxes  on  bank  stock,  certain  classes  of  per- 
sonalty and  the  salaries  of  state  officials.  But  this  was  en- 
tirely inadequate.  In  1839,  expenditures  had  exceeded 
revenues,  exclusive  of  loans,  by  over  five  million  dollars 
($6,971,000  as  compared  with  $1,900,000),  yet  the  new 
sources  were  expected  to  yield  scarcely  more  than  half  a 
million,  and  actually  did  yield  somewhat  less.  Loans  neces- 
sarily continued,  but  the  credit  of  the  state  was  so  poor  that 
it  was  found  necessary  first,  in  1841,  to  obtain  money 
through  state  "  bills  of  credit  "  which  was  unconstitutional, 
and  then,  in  1842,  to  pay  interest  to  creditors  by  means  of 
interest-bearing  certificates.2 

This  serious  financial  condition  of  the  state  finally  aroused 
the  people  so  that  the  legislature  was  forced  to  pass  more 
decisive  measures  for  relief.  In  1843  tne  sale  °f  state  secur- 
ities and  public  works  was  considered.  Two-thirds  of  the 
stock  was  sold  in  this  year  and  the  sale  of  public  works  was 
attempted  the  year  following,  but  was  not  actually  accom- 
plished until  i858.3  The  most  important  measure  was  the 
enactment  in  1844  of  a  law  subjecting  to  taxation  for  state 
and  county  purposes  all  real  estate  not  specifically  exempt, 
all  personal  estate,  corporate  stock,  bank  capital  and  indi- 
vidual incomes.  The  proceeds  of  these  taxes  were  devoted 
to  the  payment  of  the  interest  on  the  debt.  Revenues  from 

1  Worthington,  op.  cit.,  p.  42.  2  Ibid.,  p.  55  et  seq. 

3  B.  M.  Nead,  Financial  History  of  Pennsylvania,  1682-1881   (Harris- 
burg,  1881),  p.  23  et  scq. 


333]  SEPARATION  IN  PENNSYLVANIA  39 

taxes  and  licenses  rose,  following  this  law,  from  $396,000 
in  1843  to  $1,113,000  in  1844,  and  to  over  $2,000,000  in 
I846.1  In  1845  tne  tax  on  real  and  personal  estate  alone 
supplied  $1,318,332.  This  was  the  largest  single  source  of 
revenue.  Canal  and  railroad  tolls,  which  were  the  next 
largest  source,  yielded  $i,i54,592.2  In  addition  to  increas- 
ing revenue,  the  state  practiced  real  economy  in  expendi- 
ture, and  the  credit  of  the  state  was  at  once  restored.  The 
debt  was  not  reduced  appreciably  the  years  immediately  fol- 
lowing, but  in  1849  a  sinking  fund  was  established,  being 
supplied  by  the  proceeds  from  the  inheritance  tax  and  the 
taxes  on  charters  and  various  licenses. 

This  system  supplied  ample  revenues  until  the  outbreak 
of  the  Civil  War,  when  new  special  taxes  were  created. 
For  the  next  twenty  years  the  state  continuously  enacted  and 
repealed  laws  in  the  effort  to  adjust  revenues  to  needs,  but 
with  all  the  changes  there  was  a  rapid  growth  in  corporation 
taxes  and  a  steady  decline  in  taxes  on  other  property.  The 
state  tax  on  real  estate  was  repealed  in  1866  and  has  never 
since  been  imposed.  In  1873  and  1874  taxes  on  horses  and 
cattle,  and  on  corporate  loans,  were  repealed.3  Many  other 
changes  were  made  in  the  years  following,  and  in  1885  the 
personalty  tax  was  completely  revised  in  a  notable  effort  to 
reach  that  part  (estimated  to  be  85  per  cent  of  the  whole) 
which  was  escaping.  The  state  tax  was  reduced  from  4  to 
3  mills ;  mortgages  and  other  evidence  of  indebtedness  were 
exempted  from  all  local  taxation;  and  provision  was  made 
for  the  better  recording  of  such  mortgages  to  make  the  state 
tax  more  effective.4 

1  Worthington,  op.  cit,,  p.  63  et  seq. 

*  Report  of  the  Auditor  General  of  Pennsylvania,  1843,  p.  5. 

3  F.    M.    Eastman,    Taxation    for   State    Purposes    in    Pennsylvania 
(1898),  pp.  xii-xiii. 

4  Ibid.,  p.  152. 


4o      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [334 

This  act  completed  the  separation  which  had  been  started 
with  the  exemption  of  realty  from  the  state  tax  in  1867. 
There  was  a  sharp  division  of  sources.  The  localities  de- 
pended on  realty,  and  certain  forms  of  tangible  personalty 
exempt  from  state  taxation;  the  state  depended  on  person- 
alty, principally  intangible,  reserved  exclusively  for  the  state 
and  reached  through  a  variety  of  taxes.  In  1889  one-third 
of  the  tax  on  personalty  was  returned  to  the  local  districts 
in  lieu  of  all  claims  for  collection.  This  proportion  was 
raised  to  three- fourths  in  1891  and  the  rate  on  personalty 
was  raised  again  to  four  mills.  In  1913  the  tax  was  abolished 
as  a  state  tax, — such  personalty  as  was  subject  to  it  being 
turned  over  to  the  counties  to  be  taxed  by  them  at  the  same 
rate.1  The  state  still  retains  its  tax  on  the  loans  of  private 
and  municipal  corporations.  This  is  the  extent  of  Pennsyl- 
vania's experience  with  general  taxes.  Only  at  intervals  be- 
tween 1831  and  1866  was  any  real  general  property  tax 
levied. 

The  first  important  special  tax  was  one  on  bank  dividends 
imposed  in  1814.  This  was  made  a  graduated  tax  in  i835.2 
In  1840  banks  were  subjected,  in  addition  to  this,  to  the 
capital  stock  tax  imposed  in  that  year.  Both  the  scope  and 
the  rate  of  these  taxes  were  slightly  increased  by  later 
changes,  making  banks,  as  compared  with  other  corpora- 
tions, heavily  taxed.  In  1866  certain  reductions  were  made, 
and  changes,  sometimes  unimportant,  sometimes  vital,  but 
mostly  in  the  form  of  reductions  and  exemptions,  were  made 
frequently  thereafter.  The  most  sweeping  changes  took 
place  in  1881  when  an  optional  tax  on  the  par  value  of  stock 
was  offered  in  lieu  of  all  other  taxes  except  real  estate; 
in  1889  when  the  rate  of  this  tax  was  raised  and  the  tax  was 

1  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  642. 

2  Eastman,  op.  cit.,  p.  89. 


335]  SEPARATION  IN  PENNSYLVANIA  4I 

made  compulsory;  and  in  1897  when  the  system  was  unified 
and  equalized  by  abolishing  the  distinction  between  stock 
taxable  to  the  bank  and  shares  taxable  to  the  individual 
and  placing  on  all  banks  a  4  mill  tax  on  actual  value,  with 
the  option  of  a  10  mill  tax  on  the  par  value  of  all  shares.1 

No  attempt  was  made  to  reach  other  corporations  until 
1840,  except  for  the  one  mill  state  personal  property  tax  of 
1831,  which  included  corporate  stocks.  But  in  1840  a  tax 
was  imposed  on  the  dividends  of  all  domestic  corporations, 
and  later  extended  to  joint  stock  companies.  This  was 
changed  to  a  capital  stock  tax  in  1844,  and  this  tax,  with 
some  changes,  still  exists.  Manufactures  were  exempted  by 
the  laws  of  1879  and  i885.2 

In  1849  premiums  and  deposits  of  foreign  insurance  com- 
panies received  within  the  state  were  specially  taxed.  Ex- 
cept for  a  reduction  of  the  rate  in  1889,  this  tax  remains 
today.  One-half  of  the  yield  is  returned  to  the  localities. 
Domestic  insurance  companies  were  not  selected  for  special 
taxation  until  1877,  when  an  8  mill  tax  was  imposed  on 
gross  premiums  and  assessments  received  within  the  state.3 

All  corporations,  except  transportation  companies,  not 
paying  the  state  tax  on  dividends  were  subjected  in  1864  to 
a  tax  on  net  earnings  such  as  already  existed  (1861)  for 
private  bankers  and  brokers.  This  was  later  extended  to 
unincorporated  banks  and  savings  institutions.  In  1875  cor~ 
porations  subject  to  the  capital  stock  tax  and  gross  pre- 
miums tax  were  withdrawn  from  this  act.4 

A  specific  tax  was  imposed  on  the  loans  of  private  cor- 
porations in  1864,  to  be  collected  from  the  corporations. 
Such  loans  had  been  under  the  personal  property  tax  before 
this.  The  tax  was  repealed  in  1874,  but  reenacted  in  1879, 

1  Eastman,  op.  cit.,  p.  89  et  seq.  *  Ibid.,  p.  60. 

3  Ibid.,  p.  107.  *Ibid.,  p.  no. 


42      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [336 

and  revised  several  times  thereafter.  The  present  rate  of 
4  mills  has  been  employed  since  iSQi.1 

In  1866  transportation  companies  were  taxed  on  gross 
receipts  within  the  state.  This  tax  was  repealed  in  1873 
but  reenacted  in  1877,  the  rate  at  this  time  being  made  8 
mills.2 

By  the  acts  of  1868  and  1897  organization  taxes  were 
imposed  on  corporations  at  the  rates  of  one- fourth  and  one- 
third  of  one  per  cent  of  authorized  capital  stock  according 
to  the  character  of  the  corporation.3  In  1901  these  were 
extended  to  the  stock  of  foreign  corporations  employed 
within  the  state,  and  the  base  of  the  tax  was  made  actual 
instead  of  authorized  capital  stock. 

In  1897  building  and  loan  associations  were  brought 
under  a  tax  similar  to  that  on  banks.  This  same  year  an 
annual  excise  tax  was  placed  on  express  companies.  The 
rates  were  average  gross  receipts  per  mile.4 

To  sum  up,  at  the  present  time  a  capital  stock  tax  of  5 
mills  is  imposed  on  all  corporations,  domestic  and  foreign, 
except  banks,  trust  and  foreign  insurance  companies,  and 
manufacturing  companies  on  stock  engaged  in  manufac- 
turing within  the  state.  A  four  mill  tax  on  loans 
is  placed  on  all  private  corporations  (which  act  as  the 
state's  agents  in  collecting  the  tax  from  the  individual 
owner)  except  such  loans  as  are  owned  by  domestic 
corporations  paying  the  state  taxes  on  capital  stock,  by 
national  banks,  or  by  non-residents.  An  8  mill  tax  is 
placed  on  gross  receipts  of  all  transportation  and  transmis- 
sion companies,  except  gas  companies,  in  addition  to  other 
taxes.  Other  corporation  taxes  are  a  2  per  cent  tax  on 
the  premiums  of  foreign  insurance  companies  (which  is  re- 

1  Eastman,  op.  cit.,  p.  66  et  seq.  zlbid.,  p.  81. 

4  Ibid.,  p.  121.  *Ibid.,  p.  31  et  seq. 


337]  SEPARATION  IN  PENNSYLVANIA  43 

turned  to  the  localities),  an  eight  mill  tax  on  domestic  in- 
surance companies,  five  and  four  mill  taxes  on  the  capital 
stock,  surplus  and  undivided  profits  of  trust  and  banking 
companies  respectively;  ten  mills  on  distilling  companies; 
and  fees  of  one-fourth  to  one-third  of  one  per  cent  for  in- 
corporation.1 

In  addition  to  the  receipts  from  corporation  taxes  the 
state  has  two  other  large  sources  of  revenue — licenses  and 
the  inheritance  tax.  Until  1913  the  personal  property  tax 
was  also  an  important  source,  although,  with  the  exception 
of  the  tax  on  mortgages,  it  was  never  successfully  enforced. 
Licenses,  particularly  mercantile  and  liquor  licenses,  have 
been  depended  upon  from  early  times  for  large  revenues. 
They  are  shared  in  part  with  the  localities.  The  inheritance 
tax  was  introduced  in  1826,  when  it  was  imposed  on  estates 
of  over  $250  going  to  collateral  heirs,  at  the  rate  of  5  per 
cent.  A  direct  inheritance  tax  was  introduced  in  1897,  but 
was  repealed  in  1905.  The  tax  on  collateral  inheritances 
remains  as  to  rate  and  exemption  as  originally  enacted. 
Except  for  the  addition  of  a  tax  on  anthracite  coal  imposed 
in  1913, 2  and  a  stock-transfer  tax  imposed  in  191 5, 3  this 
system  stands  without  material  change  today. 

2.    LOCAL   TAXATION 

The  localities  obtain  their  revenues  from  taxes  on  occu- 
pations, which  are  virtually  poll  taxes,  subventions  from  the 
state,  taxes  on  real  estate,  horses  and  cattle,  and,  since  1913, 
vehicles  for  hire  and  certain  intangible  personalty  including 
mortgages  and  other  evidence  of  indebtedness,  stock  of  cor- 
porations not  taxed  by  the  state,  and  all  other  moneyed 
capital  in  the  hands  of  individuals.  None  of  these  sources 
is  touched  by  the  state. 

1  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  637  et  seq. 

2  Ibid.,  p.  642.  3  Conference,  1915,  p.  407. 


44      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [338 

The  occupation  tax  yielded  in  1913  only  two  per  cent  of 
all  local  receipts ;  subventions  amounted  to  five  per  cent ;  and 
licenses,  five  per  cent.1  Taxes  on  realty  and  personalty  sup- 
plied nearly  half  of  all  receipts.  Other  important  sources 
were  the  earnings  of  public-service  enterprises  and  of  gen- 
eral departments,  interest  and  rents. 

3.    SEPARATION    IN    PENNSYLVANIA 

The  history  of  Pennsylvania's  system  of  taxation,  in  so 
far  as  separation  is  concerned,  may  be  divided  into  four 
periods:  (i)  the  time  previous  to  1840,  when,  except  for 
occasional  brief  intervals,  no  state  direct  tax  was  laid;  (2) 
the  period  between  1840  and  1866,  when  the  general  prop- 
erty tax  was  the  main  source  of  revenues  for  both  the  state 
and  localities;  (3)  the  transition  period  from  1866  to  1885, 
during  which  the  state  relinquished  first  the  real  estate  tax, 
and  then  the  tax  on  horses  and  cattle,  and  the  localities 
were  deprived  of  the  privilege  of  taxing  such  personalty  as 
was  directly  taxed  by  the  state;  and  (4)  the  period  since 
1885  during  which  complete  separation  of  revenues  has 
existed. 

"  Separation  of  sources  "  is  not,  in  the  strictest  interpre- 
tation of  the  term,  complete.  The  inheritance  tax  paid  to 
the  state  must  be  derived  in  part  from  the  same  source  as 
the  local  tax  on  real  estate;  and  certain  corporations  pay  a 
local  tax  on  real  estate  the  value  of  which  is  included  in  the 
value  of  the  capital  stock  taxed  by  the  state.  But  these  ex- 
ceptions are  not  significant.  Most  of  the  corporations  pay- 
ing the  capital  stock  tax  are  exempt  from  local  taxes  on  the 
real  estate  included  in  the  value  of  their  capital  stock.  None 
of  the  loans  taxed  by  the  state  is  locally  taxed  and  none  of 

1  Computed  from  data  in  Wealth,  Debt  and  Taxation,  1913,  vol.  ii, 
pp.  122-123,  466-467. 


339] 


SEPARATION  IN  PENNSYLVANIA 


45 


the  personalty  taxed  by  the  localities  is  reached  by  the  state. 
Separation  of  source  is  for  all  practical  purposes  complete. 

TABLE  II1 
STATE  TAXES  ON  REAL  AND  PERSONAL  PROPERTY,  1841-1915 


Date 


1841. 
1845- 
1850. 

1855- 
1860. 
1865. 
1870. 
1875. 
1880. 
1885. 
1890. 
1895. 
1900. 
1905. 
1910. 


Total  Receipts 

$5,380,800 
3,010,100 
4,438,100 
5,390,500 
3,479,500 

6,220,000 

6,336,600 

6,480,100 

6,720,300 

8,179,700 

8,625,900 

12,030,000 

17,494,200 

24,269,100 

28,895,400 

30,157,000 


Receipts  from 
Realty  and 

Percentage  of  Realty 
and  Personalty 

Personalty 

Tax  Revenues 

Taxes 

to  Total 

$33,3°° 

0.6 

1,318,300 

43-8 

1,317,800 

29.7 

1,721,100 

31.9 

1,444,700 

41-5 

1,959,200 

31.5 

702,200 

11.8 

55^300 

8.5 

423,700 

6-3 

621,000 

7.6 

615,900 

7.0 

577,000 

4-8 

789,800 

4-5 

861,700 

3-7 

1,117,500 

3-9 

4.    EFFECT  OF  SEPARATION  ON  LOCAL  TAX  SYSTEMS 

Under  this  system  the  real  estate  tax  supplies  the  localities 
with  their  principal,  as  well  as  their  only  elastic  source  of 
revenue;  and  real  estate  in  consequence,  as  compared  with 
the  personalty  taxed  locally  and  all  of  the  property  taxed  by 
the  state,  bears  a  heavy  burden.  In  1907  real  estate  paid  ap- 
proximately seventeen  mills  on  assessed  value,  as  compared 
with  the  four  mill  tax  on  personalty.  In  1913  the  ratio  was 
eighteen  to  four.  This  difference  would  be  even  greater  if 
true  instead  of  assessed  value  were  considered,  since  the 
greater  undervaluation  and  evasion  of  personalty  result  in  a 
lower  average  ratio  of  assessed  to  real  value.  A  conserva- 
tive estimate  would  place  the  value  of  personalty  on  a  par 

1  Complied  from  Reports  of  the  Auditor  General. 


46      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [340 

with  the  value  of  realty,  yet  the  assessed  valuation  of  per- 
sonalty was  only  24.7  per  cent  of  that  of  realty  in  I9O4.1 
This,  even  allowing  for  the  fact  that  much  personalty,  tan- 
gible and  intangible,  is  not  taxable  in  Pennsylvania,  is  un- 
duly low.  One  estimate  2  gives  the  value  of  taxable  per- 
sonalty returned  as  77  per  cent  of  the  actual  taxable  value 
in  1895;  yet,  though  the  increase  in  the  assessed  value  of 
personalty  has  easily  kept  pace  with  the  increase  in  the 
assessed  value  of  realty,3  less  optimistic,  and  apparently 
equally  reliable  estimates  4  give  the  average  ratio  of  assessed 
to  real  value  as  being  well  under  fifty  per  cent  and  possibly 
only  twenty-five  per  cent.  It  was  estimated  to  average  only 
twenty-three  per  cent  of  actual  taxable  value  in  19 12.5 
Realty,  on  the  other  hand,  was  estimated  in  1906  to  be 
assessed  at  from  seventeen  per  cent  to  one  hundred  per  cent 
of  actual  value,  with  an  average  a  little  below  sixty  per 
cent.  In  1912  the  ratio  of  assessed  to  true  value  was  esti- 
mated to  average  58.6  per  cent.  At  this  ratio  real  estate  in 
1912  was  paying  a  little  over  eleven  mills  on  actual  value, 
whereas  personalty  was  paying  only  one  mill.  The  ratio  of 
four  to  eighteen,  taking  into  account  the  undesirability  of  a 
heavy  tax  mortgage  and  the  difficulty  of  reaching  personalty 
under  a  high  rate,  may  be  justified.  At  least  this  is  the 
ratio  intended  by  the  legislators.  But  whereas  the  system 

1  Computed  from  Annual  Report  of  the  Secretary  of  Internal  Affairs 
of  Pennsylvania,  1904  (1905),  pp.  4-56. 

2  McCrea,  iR.  C,  "  Taxation  of  Personal  Property  in  Pennsylvania," 
Quarterly  Journal  of  Economics,  vol.  xxi,  p.  81  et  seq. 

3  Taxable  realty  increased  149  per  cent  and  taxable  personalty  209  per 
cent  in  the  period   1888-1912.     Reports  of  the   Secretary   of  Internal 
Affairs  (1880-1915). 

4  E.  g.,  Secretary  of  Internal  Affairs,  Report,  1904,  p.  loB. 

5  Cf.  the  statement  of  Mr.  Weeks,  President  of  the  Pennsylvania  Tax 
Conference,   that  personalty  was   assessed  at  only  one-fourth   of   its 
actual  value,  1892.     (Weeks,  J.  D.,  Address  before  the  Manufacturers' 
Association  of  Cincinnati  and  Hamilton  Co.,  Ohio,  March  6,  1894,  p.  8). 


34i]  SEPARATION  IN  PENNSYLVANIA  47 

countenances  the  taxation  of  real  estate  at  four  or  five  times 
the  rate  of  personalty,  it  was  not  intended  that  the  rate 
should  be  ten  or  eleven  times  as  great.  And  to  this  degree 
the  system  fails. 

Both  state  and  local  expenditure,  and  in  consequence  state 
and  local  revenue,  have  been  increasing  rapidly  of  late.  In 
fifteen  years  (1899-1914)  state  expenditures  increased  103 
per  cent.1  No  data  for  local  expenditures  are  available,  but 
there  was  a  96  per  cent  increase  in  local  taxes  for  this 
period.2  The  state,  even  without  an  elastic  tax,  has  easily 
met  the  increase,  and  in  1913,  to  relieve  real  estate  taxed 
locally,  it  turned  over  the  personal  property  tax  to  the  coun- 
ties. The  yield  of  this  was  approximately  five  million  dol- 
lars in  1914.  This  should  reduce  the  tax  on  real  estate  be- 
tween one  and  two  mills. 

But  it  is  not  so  much  the  weight  of  the  tax  as  the  in- 
equality which  makes  the  real  estate  tax  burdensome.  In 
1913,  according  to  the  federal  census,  real  estate  was  as- 
sessed at  58.6  per  cent  of  true  value.3  This  same  average 
ratio  of  valuation  was  given  in  1892,  in  which  year  varia- 
tions within  counties  were  estimated  at  from  20  to  93 
per  cent.  In  1895  estimates  were  made  as  follows:  range 
between  cities,  16  to  87  per  cent;  range  between  bor- 
roughs,  22  to  104  per  cent;  range  between  counties, 
20  to  93  per  cent;  range  between  townships,  21  to  95 
per  cent;  range  between  town  lots  of  one  county,  9  to 
117  per  cent;  range  between  farmlands  of  one  county, 
1 6  to  no  per  cent.4  Many  other  examples  are  given,  and 

1  Computed  from  data  in  Treasurer's  Report  for  the  years  cited. 

2  Computed  from  data  in  Report  of  the  Secretary  of  Internal  Affairs, 
for  the  years  cited. 

3  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  16. 

4  Pennsylvania  Tax  Conference,  189$ — Selling  Price,  Assessed  Valua- 
tion and  Taxation  of  Real  Estate  in  Pennsylvania,  passim. 


48      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [342 

even  though  they  are  extreme  cases  they  are  sufficiently 
frequent  to  be  of  serious  concern.  There  is  no  reason  to 
suppose  that  inequalities  are  appreciably  less  now. 

The  localities  have  been  assisted  somewhat  by  the  state, 
for,  quite  contrary  to  the  experience  of  most  states  under 
separation,  the  state  has  had  ample  revenues.  This  has  re- 
duced the  tax  on  real  estate,  which,  although  high  as  com- 
pared with  that  on  personalty,  is  not  high  compared  with  the 
tax  rate  on  real  estate  in  other  states.  Michigan  with  a 
twelve  mill  tax  on  the  actual  value  of  general  property,  in 
1911,  Wisconsin  with  a  thirteen  mill  tax,  in  1913,  and  New 
York  with  a  seventeen  mill  tax,  1914,  were  all  burdening 
real  estate  with  a  heavier  tax  than  Pennsylvania  with  an 
eleven  mill  tax.  These  differences  in  the  rate  on  actual  value 
would  appear  even  greater  if  real  estate  could  be  separated 
from  personalty,  for  this  is  the  average  rate,  in  every  case 
except  Pennsylvania,  for  both  realty  and  personalty,  and 
realty  under  the  general  property  tax  always  bears  the 
larger  share.  Further  than  this,  personalty  is  more  success- 
fully reached  in  Pennsylvania  than  in  most  states  with  a 
local  general  property  tax.  One-fourth  of  the  value  of 
property  taxable  under  the  local  personal  property  tax  is 
reached.  In  other  states,  e.  g.  Illinois  *  and  New  York,2 
the  proportion  is  much  less.  Apparently  the  higher  rate  on 
personalty  is  more  than  offset  by  the  increased  evasion. 
Better  administration  or  new  special  taxes  will  be  necessary 
if  it  is  desired  to  make  personalty  pay  a  larger  share.  But 
when  it  is  considered  that  real  estate  pays  no  state  taxes, 
and  that  the  local  tax  is  smaller  than  elsewhere,  it  would 
seem  that  real  estate  is  not  overburdened,  and  perhaps  could 

1  Cf.  J.  A.  Fairlie,  Report  on  the  Taxation  and  Revenue  System  of 
Illinois  (1910),  p.  2  et  seq.,  p.  37  et  seq. 

2  Report  of  the  Joint  Legislative  Committee  on  Taxation,  New  York, 
1916,  p.  69. 


343]  SEPARATION  IN  PENNSYLVANIA  49 

bear  the  whole  weight  of  local  taxation  without  serious 
embarrassment. 

5.    EFFECT  OF  SEPARATION  ON  THE  STATE  TAX  SYSTEM 

Turning  to  the  state  system  under  separation,  there  seems 
to  have  been  no  effort  to  equalize  the  burden  of  state  taxes 
on  the  corporations.  Following  the  usual  custom  of  states, 
manufactures  have  been  largely  exempted  lest  they  leave 
the  state,  and  transportation  companies,  which  cannot  leave, 
have  been  most  heavily  burdened.  There  is  further  in- 
equality in  the  separate  taxation  o>f  stocks  and  bonds.  That 
corporation  which  has  the  largest  proportion  of  its  capital 
in  stocks  pays  highest,  for  the  tax  on  stock  is  five  mills 
while  that  on  bonds  is  only  four.  Further,  in  so  far  as  the 
bonds  are  held  by  a  non-resident,  the  corporation  escapes 
entirely;  for  the  tax  is  a  tax  on  the  holder,  not  on  the  cor- 
poration. More  than  this,  the  resident  holders  of  the  bonds 
of  foreign  corporations  generally  escape,  since  the  state 
may  not  collect  the  tax  through  the  corporations,  even 
though  it  be  doing  business  in  the  state,  while  the  resident 
holder  of  domestic  bonds  pays.  There  are  other  inequali- 
ties which  have  no  apparent  economic  reason.  To  cite  a 
specific  instance,  gas  companies  are  not  subject  to  the  gross 
receipts  tax  while  electric  light  companies  are.  The  com- 
petition between  these  two  classes  of  corporations  makes 
the  tax  on  electric  companies  a  serious  handicap.  These 
inequalities  could  for  the  most  part  be  remedied  by  a  gross 
or,  better  yet,  a  net  earnings  tax  widely  applied.  They  are 
not  a  fault  of  separation,  and  there  is  no  reasonable  doubt, 
judging  from  the  experience  of  states  employing  the  gen- 
eral property  tax,  that  if  these  corporations  were  taxed 
under  the  direct  tax  the  inequalities  would  be  magnified 
many  times;  and,  furthermore,  the  state  would  obtain  less 
revenue. 


50     SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [344 

Centralization  of  administration,  which  is  so  widely 
favored  at  the  present  time,  has  apparently  been  slightly 
checked  by  separation  in  Pennsylvania.  There  is  nothing 
to  prevent  such  centralized  administration  under  separation, 
but  there  is  less  incentive  in  the  absence  of  a  state  direct 
tax.  The  collateral  inheritance  tax,  licenses,  and  the  taxes 
on  writs,  wills  and  deeds,  and  fees  of  office  are  locally  ad- 
ministered; but,  being  state  taxes,  the  administration  is 
carefully  supervised  by  the  state  auditor  general.  This  was 
also  true  of  the  personal  property  tax  before  it  was  turned 
over  to  the  localities.  But,  except  for  the  examination  of 
accounts  of  county  officers  by  expert  accountants  under  the 
direction  of  the  auditor  general,  and  the  requirement  that 
the  county  commissioners  shall  furnish  certain  statistical  in- 
formation concerning  assessments  and  taxation  to  the  sec- 
retary of  internal  affairs,  no  attention  is  paid  to  local  tax 
administration.  Were  the  real  estate  and  personalty  taxes 
used  by  the  state  they  would  doubtless  be  subject  to  the 
same  state  control  as  the  other  locally  administered  state 
taxes.  Separation  has  doubtless  retarded  central  control 
of  local  revenue,  but  it  does  not  prevent  it.  The  need  of 
such  control  is  great,  for  the  local  officials  are  unable,  or 
unwilling,  to  correct  the  inequalities  of  assessment  between 
the  different  assessment  districts  of  each  county  on  which 
the  county  tax  is  levied,  and  between  the  different  properties 
within  one  assessment  district. 

The  secretary  of  internal  affairs  is  urging  the  extension 
of  his  powers  to  give  him  the  right  to  supervise  local  assess- 
ments and  taxation,  and  to  advise  local  officers  and  institute 
proceedings  against  those  who  fail  to  comply  with  the  law. 
There  is  no  reason  why  such  supervision  should  not  be 
maintained,  though  little  has  thus  far  been  done  to  obtain  it. 

Owing  to  the  very  effective  corporation  taxes  the  state 
system  has  been  successful  from  the  standpoint  of  yield. 


345] 


SEPARATION  IN  PENNSYLVANIA 


The  corporation  taxes  may  have  their  shortcomings,  but 
they  have  at  least  proved  highly  productive  and  state  reve- 
nues up  to  the  present  time  have  been  ample.  Ninety  per 
cent  of  the  receipts  of  the  general  fund  come  from  taxes 
and  licenses.  Seventy  per  cent  o<f  these  receipts  are  cor- 
poration taxes.  The  capital  stock  tax  is  especially  produc- 
tive. Its  yield  in  1915  was  nearly  thirteen  million,  being 
over  two-fifths  of  total  receipts;  and  it  exceeded  by  nearly 
ten  million  the  yield  from  any  other  single  source. 

TABLE  III1 

IMPORTANT  SOURCES  OF  STATE  REVENUES,  1915 
Source  Amount  Per  eent 

Total,  General  Fund  ..............       $30,157,000  .... 

Corporations  ......................         21,384,000  71 

Licenses  -----  ....................  3,741,300  12 

Inheritances  .....................  2,285,400  7 

CORPORATION  TAXES,  1915 
Total  ............................      $21,384,000  loo 

Capital  Stock  .....................  12,897,800  60 

Corporation  Loans  ................  3»253»9°°  '5 

Gross  Receipts  ...................  1,675,200  8 

Foreign  Insurance  Companies  ......  1,894,800  9 

Bank  Stock  ......................  1,082,800  5 

Miscellaneous  ....................  579»4O°  3 

In  consequence  of  this  large  yield  and  relatively  light  ex- 
penditure the  state  has  practically  cancelled  all  debts,  and  has 
for  twenty-five  years  enjoyed  a  considerable  net  surplus. 

Whether  or  not  this  surplus  has  encouraged  extravagance 
is  difficult  to  determine.  There  has  unquestionably  been 
some  misuse  of  funds,  but  the  rise  in  state  expenditure  dur- 
ing the  decade  from  1903  to  1913  in  which  the  surplus  kept 
well  above  five  million,  was  not  abnormal.  The  increase 

1  Compiled  from  data  in  the  Treasurer's  Report,  1915,  passim. 


52      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [346 

was  one  hundred  per  cent.1  This  is  greater  than  the  total 
increase  in  state  expenditure  (68  per  cent)  in  the  United 
States  during  this  period,  but  is  not  as  great  as  the  increase 
in  a  large  number  of  the  more  developed  states  which  enjoy 
no  surplus.  The  increase  in  California  was  120  per  cent, 
Connecticut,  131  per  cent,  New  Jersey,  146  per  cent,  Wis- 
consin, 167  per  cent,  and  New  York,  222  per  cent. 

Large  surpluses  are  likely  to  prove  as  embarrassing  as 
deficits,  but  the  growing  expenditure  in  Pennsylvania,  and 
the  state's  policy  of  turning  revenues  over  to  the  localities, 
will  probably  keep  this  surplus  low.  It  has  decreased  in  the 
past  five  years.  In  fact  there  is  a  very  real  danger  that  ex- 
penditures will  shortly  overtake  revenues.  But  whether 
the  state  experiences  a  surplus  or  a  deficit,  it  cannot  hope 
to  make  revenues  conform  to  expenditures  in  the  absence  of 
an  elastic  tax.  The  natural  increase  in  revenues,  following 
the  development  of  corporations,  will  correspond  only 
crudely  to  growth  in  expenditures.  Only  through  fre- 
quently devising  new  sources  or  giving  up  old  ones,  to- 
gether with  the  alternate  accumulation  and  paying  off  of  a 
debt,  which  is  at  best  a  clumsy  method,  can  the  state  under 
the  present  system  attain  any  real  adjustment  of  revenues 
to  expenditures.  Judging  from  the  experience  of  other  states 
an  elastic  tax  would  seem  sooner  or  later  to  be  inevitable. 
Pennsylvania  has  never  had  such  a  source  and  apparently  has 
not  suffered  in  consequence.  Without  an  undue  amount  of 
legislation  revenues  regularly  balanced  expenditures  until  the 
large  debt  had  been  nearly  paid  off.  This  is  explained  by 
the  fact  that  expenditures  were  adjusted  to  revenues  rather 
than  revenues  to  expenditures.  The  enormous  debt  created 
between  1825  and  1850  necessitated  the  creation  of  the  new 
and  more  remunerative  sources  of  revenue.  As  these  were 

1  Wealth,  Debt  and  Taxation,  1913,  vol.  ii,  pp.  40-43. 


347]  SEPARATION  IN  PENNSYLVANIA  53 

developed  and  made  to  yield  increasing  revenues  the  payment 
of  the  debt  each  year  absorbed  every  dollar  that  could  be 
spared  from  regular  expenditure.  Not  until  1891  did  a 
surplus  arise,  and  since  that  time  there  has  not  been  the  same 
close  correspondence  between  revenue  and  expenditure.  The 
two  must  be  brought  into  practical  agreement.  Any  further 
attempt  to  adjust  expenditure  to  revenue  is  likely  to  lead  to 
extravagance,  or  to  equally  undesirable  parsimony.  If  rev- 
enues are  to  be  adjusted  to  expenditures  an  elastic  tax  would 
seem  to  be  the  only  solution. 


OF 


CHAPTER  IV 

SEPARATION  IN  NEW  YORK 

I.  HISTORY  OF  THE  GENERAL  PROPERTY  TAX 

NEW  YORK,  following  the  precedent  set  by  Pennsylvania,1 
embarked  in  1880  on  a  policy  of  corporation  taxation  which 
led  eventually  to  almost  complete  separation. 

The  general  property  tax  was  at  this  time — and  had  been 
for  some  years — supplying  the  state  with  most  of  its  rev- 
enues ($6,169,700  in  1879,  which  was  87  per  cent  of  the 
receipts  of  the  general  fund  of  that  year,  and  99  per  cent 
of  all  taxes).2  This  tax  did  not,  however,  become  an  in- 
tegral part  of  the  New  York  tax  system  in  the  early  history 
of  the  state,  as  was  the  case  in  the  New  England  states. 
Although  regularly  used  by  the  localities  before  1850  it  was 
employed  by  the  state  only  in  case  of  emergency.  Thus  it 
was  levied  in  1799  when  large  borrowing  for  current  ex- 
penses made  it  necessary  for  three  years;  and  again  in  1815 
when  it  was  resorted  to  to  pay  off  the  large  debt  which  had 
accumulated  as  the  result  of  the  policy  of  borrowing  money 
to  meet  appropriations  whenever  they  exceeded  revenues.3 
Having  paid  off  this  debt  in  1826,  the  tax  was  discontinued 
in  spite  of  large  canal  expenditure  and  growing  yearly 
deficits.4 

1  D.  C.  Sowers,  "  Financial  History  of  New  York  State,"  1798-1912, 
Columbia   University  Studies  in  History,  Economics  and  Public  Law 
(New  York,  1914),  vol.  Ivii,  no.  2,  p.  152. 

2  Computed  from  data  in  Sowers,  op.  cit.,  pp.  328-329. 
8  Ibid.,  pp.  114-115. 

4Possibily  because  of  the  growing  canal  expenditure,  since  those  in- 
terested in  the  development  of  the  canal  feared  by  a  direct  tax  to  call 
the  heavy  expenditure  to  the  attention  of  the  people. 

54  [348 


349]  SEPARATION  IN  NEW  YORK  55 

It  was  not  until  1842  that  the  growing  burden  from  canal 
and  railway  debt  made  it  necessary  again  to  have  recourse 
to  the  general  property  tax  for  state  purposes,  and  the  "  stop 
and  tax  law  "  of  one  mill  on  real  and  personal  estate  was 
then  enacted.  This  tax  soon  became  the  most  important 
part  of  the  system.  It  was  continued  at  a  varying  but  com- 
paratively low  rate  until  1857,  when  the  rate  rose  to  three 
mills;  and  in  the  years  during  and  after  the  Civil  War  it 
was  increased  rapidly,  until  in  1872  it  reached  the  excessive 
rate  of  9.4  mills,  —  making  the  entire  burden  on  general 
property,  for  state  and  local  taxes,  thirty  mills,  as  compared 
with  seven  mills  in  1852. *  This  burden  was  not  of  course 
borne  with  equanimity.  The  always  flagrant  evils  of  the 
state  general  property  tax  were  exaggerated  by  the  high 
rate.  But  objections  were  for  long  unavailing. 

The  general  property  tax  was  from  its  inception  a  source 
of  complaint  from  the  comptrollers.  As  early  as  1844  the 
comptroller  was  conscious  of  inequalities  between  the  coun- 
ties, but  he  confidently  expected  the  tax  to  encourage 
economy  so  that  the  need  for  it  would  be  of  short  duration.2 
It  was  originally  imposed  as  a  temporary  measure,  to  be 
discontinued  when  the  canal  revenues  should  exceed  the 
canal  expenditures  by  more  than  one-third  of  the  interest 
due  on  the  canal  debt.3  But,  although  this  condition  was 
attained  in  1845,  tne  levy  continued,  and  with  the  rise  in 
the  rate  the  complaints  became  more  insistent.4  At  one 
time  it  was  the  unjustifiable  exemptions  extended  to  cor- 
porations which  were  emphasized ;  again  it  was  the  discrim- 
ination in  favor  of  personalty  through  permitting  the  deduc- 

1  Report  of  the  Joint  Legislative  Committee  on  Taxation  (New  York, 
1916),  p.  i. 

1  Report  of  the  Comptroller,  New  York,  1844,  p.  76. 

3  Tax  Law,  New  York,  1842,  ch.  cxiv,  sec.  9. 

4  Ibid.,  1848,  p.  21. 


56      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [350 

tion  of  debts.  One  year  it  was  inequalities  in  the  rate  of 
valuation  between  the  different  counties  of  other  tax  districts 
which  caused  dissatisfaction;  another  year  it  was  the  general 
evasion  of  the  tax  by  personalty.  In  1854  the  difficulty 
of  the  local  assessment  of  railway  property  was  the  prin- 
cipal grievance;  in  1857,  the  law  having  been  changed,  the 
self-assessment  permitted  to  railroads  was  scored  as  being 
manifestly  unjust.  The  total  escape  of  the  personal  prop- 
erty of  corporations,  through  the  prevailing  practice  of 
designating  as  the  location  of  the  head  office  some  out  of  the 
way  place  where  the  assessor  was  totally  unaware  of  the 
corporation's  existence,  later  caused  complaint ;  and  the  diffi- 
culty of  getting  prompt  payments  from  the  county  treas- 
urers was  a  constant  source  of  annoyance.1 

As  the  defects  were  pointed  out  remedies  were  suggested, 
mostly  in  the  administration  of  the  tax.  The  changes 
urged  most  frequently  were  central  assessment  of  corpora- 
tions by  the  state  comptroller,  wider  powers  of  supervision 
by  the  state  board  of  equalization,  and  abolition  of  special 
exemptions  to  corporations  and  of  deductions  for  debts 
from  personalty.  No  really  radical  changes  were  advocated, 
though  the  possibilities  of  indirect  taxation  were  at  times 
discussed  and  one  comptroller  even  suggested  the  feasibility 
of  an  income  tax  at  some  later  date.2 

County  boards  of  equalization  had  existed  since  the  be- 
ginning of  the  century,  but  they  had  no  power  to  touch  the 
inequalities  between  counties.  In  1859  a,  state  board  was 
created  to  deal  with  these  inequalities,  but  its  powers  were 
so  narrow  that  it  proved  entirely  ineffective.  The  legisla- 
ture appointed  committees  of  investigation  in  1862,  and 
again  in  1870,  but  no1  action  was  taken  on  their  recommen- 

1  Cf.  Report  of  the  Comptroller,  New  York,  1854-1873. 
Ubid.,  1865,  p.  46. 


351]  SEPARATION  IN  NEW  YORK  57 

dations.1  Far  from  alleviating  financial  conditions,  the 
legislature  instead  aggravated  them.  As  early  as  1852  the 
comptroller  pointed  out  that  expenditures  tended  to  over- 
reach revenues,2  and  that  official  in  1854  complained  that 
the  legislature  showed  a  "tendency  towards  a  very  liberal 
use  of  public  money,"  3  but  he  found  comfort  in  the  belief 
that  the  direct  tax  would  soon  arrest  extravagance.  His 
successor,  however,  doubted  the  value  of  this  check.4  In 
1875  the  comptroller  charged  that  the  annual  supply  bill 
contained  many  unjustifiable  claims;  that  the  heavy  expen- 
diture for  public  buildings  following  the  Civil  War  was 
unnecessary;  that  the  canal  expenditure  covered  much  that 
was  not  legitimate ;  and  that  subventions  to  private  charities 
were  abused.  But  while  the  extravagance  of  the  legislature 
was  repeatedly  deplored  no  effort  was  made  to*  retrench, 
and  for  a  time  the  legislature  did  not  even  authorize  the 
necessary  taxes  to  cover  the  generous  appropriations  it 
made.  But  meanwhile  a  substantial  reduction  of  the  debt 
was  being  effected,  and  the  legislature  in  1871  began  to 
authorize  the  proper  taxes.  After  1873  an  appreciable  re- 
trenchment in  appropriations  was  noticeable,  so  that  it  was 
possible  to'  lighten  the  heavy  state  tax  on  property  until  in 
1880  it  had  fallen  to  3.5  mills. 

In  this  year  for  the  first  time  definite  action  was  taken 
toward  improving  the  state  system  by  introducing  special 
corporation  taxes,  and  reducing  the  objectionable  general 
property  tax  accordingly.  This  act  launched  the  state  on  a 
program  of  taxation  which,  through  the  adoption  of  special 
taxes  for  state  purposes  with  a  corresponding  cutting  down 

1  Report  of  the  Tax  Commissioners,  New  York,  1897,  p.  7. 

2  Report  of  the  Comptroller,  New  York,  1852,  p.  7. 

3  Ibid.,  1854,  P.  9-  4  Ibid.,  1855,  p.  13. 


58      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [352 

of  the  general  property  tax,  eventually  led  to  separation.1 
From  this  year  onward  the  state  became  increasingly  less 
dependent  on  the  general  property  tax  until,  in  1906,  it  was 
found  possible  to  abandon  it  altogether.  For  five  years  the 
state  derived  sufficient  revenues  from  special  taxes,  but 
once  more  the  growth  of  the  canal  debt — this  time  supple- 
mented by  large  highway  expenditures — forced  the  state  to 
resort  to  the  direct  tax.  i 

2.  HISTORY  OF  SPECIAL  TAXATION  AND  THE  PRESENT  SYSTEM 

Before  1880  special  taxes  had  never  played  an  important 
part  in  the  state's  finances.  In  1823  a  special  tax  had  been 
placed  on  bank  stock,  notes,  bonds  and  mortgages,  to-  be 
paid  by  the  banks  and  divided  in  part  among  the  several 
counties  according  to  the  residence  of  the  stockholders. 
This  law,  which  stands  almost  alone  as  an  attempt  to  devise 
special  taxes  in  this  early  period,  was  found  difficult  to 
enforce  and  proved  to  be  a  small  and  rapidly  diminishing 
source  of  revenue. 

In  the  first  half-century  of  the  state's  existence  it  was 
largely  supported  by  the  proceeds  from  the  sale  of  public 
lands,  and  from  state  investments — the  former  source  sup- 
plying for  a  few  years  over  half  of  the  state's  income,  and 
the  latter  in  the  early  years  of  the  nineteenth  century  from 
one-half  to>  one-third  of  all  revenue.  *  Lotteries,  which 
were  at  times  resorted  to  for  special  purposes,  e.  g.,  educa- 
tion, roads  and  charities,  were  found  to  be  very  remunera- 
tive, and  auction  duties  for  a  time  yielded  from  one-fifth  to 
one-sixth  of  the  total  state  revenues.  The  returns  from 

1  While  the  growth  of  separation  in  New  York  began  as  an  effort  to 
reach  personalty  through   classification,  the  fact  that  separation  was 
urged  as  a  reform  measure  by  Professor  Seligman  and  others  was  un- 
questionably in  part  responsible  for  its  final  attainment. 

2  Sowers,  op.  cit.,  pp.  324-326. 


353]  SEPARATION  IN  NEW  YORK  59 

this  last  source,  together  with  the  proceeds  of  salt  works 
and  a  special  steamboat  tax,  were  for  a  time  diverted  to  the 
insatiable  canal  fund.  The  expenses  of  new  departments 
created  by  the  state  for  the  regulation  of  banks  (1839), 
railroads  (1856),  and  insurance  companies  (1859)  were 
easily  met  by  fees  levied  on  the  companies  concerned.  The 
general  property  tax,  after  its  introduction  in  1842,  was 
expanded  to  meet  the  rapidly  growing  expenditures  until  it 
became  an  intolerable  burden,  borne  only  as  long  as  made 
necessary  by  an  urgent  demand  for  money  and  the  extrava- 
gance, unresourcefulness  and  procrastination  of  the  legis- 
lature. 

Finally  in  1880  a  law  was  enacted  levying  an  annual  tax 
on  the  franchises  of  corporations,  joint-stock  companies  or 
associations  doing  business  in  the  state.1  This  tax  was  not 
comprehensive.  It  aimed  only  to  reach  the  intangible  prop- 
erty of  certain  corporations  for  state  purposes.  Many  cor- 
porations were  exempted,  remaining  under  the  general 
property  tax  for  state  and  local  purposes.  Even  those  liable 
continued  to  pay  state  taxes  on  their  real  estate  and  local 
taxes  on  property  in  general.  The  local  systems  remained 
unchanged.  No  property  was  exempted  from  local  taxes. 
But  the  new  tax  marked  a  turning  point  in  methods  of  state 
taxation,  and  more  than  that,  it  soon  yielded  large  revenues. 
A  great  deal  of  litigation  followed  the  enactment  of  this  law, 
but  with  little  effect  on  the  yield  of  the  tax.  The  law  was 
amended  wherever  it  was  found  defective  and  the  comp- 
troller was  granted  large  powers  in  enforcing  it ;  so  that  in 
time,  and  with  a  few  changes,  it  reached  most  of  the  cor- 
porations liable.2 

From  this  beginning  the  present  system  of  corporation 
taxation  has  grown.  Briefly  it  is  as  follows :  An  organiza- 
tion tax  of  one-twentieth  of  one  per  cent  (with  $5  as  a 
1  Sowers,  op.  cit.,  p.  152  et  seq.  2  Ibid.,  p.  152  et  seq. 


60      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [354 

minimum)  is  imposed  on  every  stock  corporation  incor- 
porated in  the  state.1  This  tax  when  originally  imposed  in 
1886  was  one-eighth  of  one  per  cent,  but  was  reduced  in 
1901  owing  to  competition  from  New  Jersey  and  Connec- 
ticut.2 

Foreign  corporations — other  than  banking,  insurance  and 
loan  companies — pay  a  license  tax  of  one-eighth  of  one  per 
cent  on  capital  employed  within  the  state.3  This  is  paid  on 
such  capital  when  the  company  begins  to  operate  in  the 
state  and  on  any  increase  in  the  capital  thereafter. 

A  general  franchise  tax  is  imposed  on  both  domestic  and 
foreign  corporations,  being  an  annual  tax  on  the  franchise 
of  corporations,  joint-stock  companies  or  associations 
doing  business  in  the  state,  the  value  of  such  franchise  to 
be  determined  by  the  value  of  capital  stock  employed  in  the 
state  during  the  year  preceding.  The  law  as  first  enacted 
(1880)  taxed  total  capital  stock,  but  this  was  later  (1885) 
amended  to  make  only  that  portion  of  the  stock  used  within 
the  state  taxable.  The  present  rates  are  one- fourth  of  one 
mill  for  each  one  per  cent  of  dividends,  based  on  the  par 
value  of  capital  stock,  of  every  corporation  declaring  divi- 
dends of  six  per  cent  or  more ;  1.5  mills  per  dollar  of  capital 
stock  (the  value  of  capital  stock  being  net  assets  or  average 
selling  value  according  as  one  or  the  other  is  higher)  on 
those  corporations  declaring  dividends  of  less  than  six  per 
cent  whose  assets  exceed  their  liabilities;  and  three-fourths 
of  one  mill  per  dollar,  computed  on  average  selling  value, 
on  corporations  paying  no  dividends  or  insolvent  corpora- 
tions paying  less  than  six  per  cent. 4 

All  banks,  trust  and  savings  companies,  insurance,  title 
guaranty  and  surety  companies,  laundering,  manufacturing 
and  mining  companies,  having  at  least  40  per  cent  of  their 

lTax  Law,  1915,  sec.  180.  2 Report  of  the  Comptroller,  1901,  p.  xxxvi. 
3  Tax  Law,  1915,  sec.  181.      4  Ibid.,  1915,  sec.  182. 


355]  SEPARATION  IN  NEW  YORK  6l 

capital  stock  invested  in  property  in  the  state,  and  water, 
light,  heat  and  power  companies  are  exempt  from  this  tax.1 

Domestic  savings  banks  have,  since  1901,  paid  a  fran- 
chise tax  of  one  per  cent  on  par  value  of  surplus  and  un- 
divided earnings.2  Foreign  bankers  are  subject  to  a  tax  of 
five  per  cent  on  interest  or  other  earnings  on  money  em- 
ployed within  the  state.3  Domestic  trust  companies  pay  a 
franchise  tax  of  one  per  cent  on  average  capital  stock,  sur- 
plus and  undivided  profits.4  National  and  state  banks  have 
paid,  since  1901,  a  tax  of  one  per  cent  on  average  capital 
stock,  surplus  and  undivided  profits  assessed  to  the  share- 
holders at  the  place  where  the  bank  is  located.5  This  tax  is 
distributed  among  the  different  tax  districts  according  to  the 
proportion  that  the  tax  rate  of  each  district  bears  to  the 
total  tax  rate,  including  county  and  state,  of  property  in 
that  district.  Individual  bankers  pay  no  special  state  tax. 

Insurance  companies,  which  were  first  specially  taxed  in 
1880,  have  been  subjected  since  to  taxes  on  gross  premiums 
at  frequently  changing  rates  and  with  varying  exemptions. 
The  rates  vary  and  are  based  upon  gross  premiums  for 
business  done  within  the  state.  Life,  casualty  and  health 
insurance  companies  of  the  United  States  pay  one  per  cent 
on  premiums ;  those  of  foreign  countries  pay  two  per  cent. 
Domestic  (New  York)  fire  insurance  companies  pay  one  per 
cent  to  the  state;  those  of  foreign  countries  pay  one-half 
of  one  per  cent.  (Fire  insurance  corporations  of  other 
states  or  countries  pay  also  two*  per  cent  to  local  fire  depart- 
ments. )  Domestic  marine  insurance  companies  pay  one  per 
cent;  those  of  other  states,  two  per  cent;  and  those  of  for- 
eign countries,  2.5  per  cent.  Surety  companies  pay  one  per 
cent.  Fraternal  and  mutual  benefit  associations  are  exempt 

1  New  York  Tax  Law,  1915,  sec.  183. 

*Ibid.,  sec.  189.  *Ibid.,  sec.  192. 

4  Ibid.,  sec.  188.  5  Ibid.,  sec.  24. 


62      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [356 

from  this  tax.  Domestic  mutual  life-insurance  companies 
are  exempt  from  the  personal  property  tax.1 

Water,  light,  heat  and  power  companies  have,  since  1899, 
been  taxed  one-half  of  one  per  cent  on  gross  earnings 
within  the  state  and  three  per  cent  on  dividends  in  excess 
of  four  per  cent  declared  on  paid-up  capital.2 

Elevated  and  surface  railways  not  operated  by  steam  pay 
a  state  tax  of  one  per  cent  on  gross  earnings  within  the 
state  plus  three  per  cent  on  dividends  in  excess  of  four  per 
cent  declared  on  paid-up  capital.  A  leased  railroad  pays 
only  the  tax  on  dividends.3 

All  other  transportation  and  transmission  companies  must 
pay  a  tax  of  one-half  of  one  per  cent  on  gross  earnings  from 
intrastate  business.  This  is  in  addition  to  the  capital  stock 
tax,  state  taxes  on  real  estate  and  local  general  property 
taxes.4 

Special  franchises  are  classified  as  real  estate,  and  are  as- 
sessed by  the  state  tax  commissioners, — such  special  fran- 
chises being  the  value  of  the  privilege  of  using  streets  and 
highways,  together  with  the  value  of  real  estate  and  tangible 
property  thereon.  These  special  franchises  are  placed  on  the 
local  rolls  and  taxed  locally  at  the  same  rate  as  other  prop- 
erty. Other  real  estate  of  corporations  is  separately  as- 
sessed by  the  local  officials. 

Corporations  are  further  subject  to  the  general  property 
tax  of  the  various  local  taxing  districts  in  which  they  are  lo- 
cated. In  consequence  some  corporations  are  paying  as 
many  as  eleven  different  kinds  of  taxes.5  The  inexcusable 
ambiguity  of  many  of  the  laws  adds  to  the  confusion  of 
this  system. 

1  New  York  Tax  Law,  1915,  sec.  187.  *  Ibid.,  sec.  186. 

3  Ibid.,  sec.  185.  *Ibid.,  sec.  184. 

6  Conference,  1909,  p.  182. 


357J  SEPARATION  IN  NEW  YORK  63 

In  developing  a  system  of  special  taxes  New  York  has  by 
no  means  confined  herself  to  corporation  taxes.  Other 
sources,  some  of  which  have  at  times  proven  even  more 
lucrative  than  the  corporation  taxes,  have  been  developed. 

The  first  of  these  is  the  inheritance  tax.  A  law  was 
passed  in  1885  which  placed  a  tax  of  five  per  cent  on  all 
bequests  to  collateral  heirs  where  the  estate  exceeded  $500. l 
This  remained  with  slight  alterations  until  1892  when  a  tax 
of  one  per  cent  was  placed  on  all  estates  over  $10,000  going 
to  direct  heirs.  No  important  changes  were  made  after  this 
until  1910  in  which  year  the  law  was  completely  revised.  The 
tax  was  graduated,  running  as  high  as  twenty-five  per  cent.2 
But  the  next  year  it  was  again  revised  and  brought  down 
to  a  more  moderate  scale.  As  it  now  stands  the  basis  of 
the  tax  is  the  individual  bequest,  not  the  total  estate.  The 
exemption  for  direct  heirs  is  $5,000,  for  collateral  $1,000. 
The  rate  on  direct  heirs  is  one  to  four  per  cent,  and  on  col- 
lateral heirs,  five  to  eight  per  cent.3  This  applies  to  all 
tangible  property  in  the  state  and  intangible  property  of 
residents  only.4 

In  1887  a  five  per  cent  tax  was  levied  on  gross  receipts 
from  admissions  to  race  tracks.  This  grew  to  yield  a  con- 
siderable revenue,  but  the  proceeds  were  used  for  prizes  at 
county  fairs,  not  for  general  expenditure.5  It  was  repealed 
in  1910. 

An  excise  tax  placed  on  liquor  in  1896  yields  large  rev- 
enues. A  slight  income  was  obtained  from  this  source  be- 
ginning in  1892,  but  with  the  establishment  of  a  state  license 
system  in  1896  with  charges  according  to  the  character  of 

1  Sowers,  op.  cit.,  p.  169.  ^Conference,  1910,  p.  302. 

3  Tax  Law,  1915,  sec.  220. 

4  Before  1911  the  state  had  attempted  to  tax  the  intangible  property 
of  non-residents  also. 

5  Sowers,  op.  cit.,  p.  178. 


64      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [358 

the  business  and  the  population  of  the  city  where  it  was 
located,  the  yield  to  the  state  rose  to  over  $3,500,000,  and 
has  been  growing  steadily  since.  This  is  collected  by  the 
state  and  half  of  the  proceeds  are  redistributed  among  the 
localities.1 

A  motor  vehicle  tax  of  $5  to  $25  2  first  imposed  in  1904, 
now  yields  a  considerable  revenue  which  goes  entirely  to 
the  state. 

In  1905  a  tax  was  laid  on  all  transfers  of  shares  of  stock 
at  the  rate  of  two  per  cent  on  $100  par  value.  This  has 
become  an  important  source.  Also  in  1905  a  mortgage  tax 
law  was  first  passed  levying  an  annual  tax  of  one-half  of  one 
per  cent  on  all  recorded  mortgages.  It  yielded  to  the  state 
nearly  half  a  million  dollars  the  first  year.  It  was  changed 
in  1906  to  a  recording  tax  of  one-half  of  one  per  cent.3 
By  1915  it  was  producing  over  $3,000,000,  half  of  which 
was  retained  by  the  state. 

Finally,  in  1911,  a  secured  debt  tax  law  was  passed,  sub- 
stituting a  low  rate  tax  for  the  ineffective  personal  property 
tax  on  securities.  The  rate  was  made  one  half  of  one  per 
cent  of  face  value.4  In  1915,  and  again  in  1916,  this  law 
was  amended  so  that  secured  debts  registered  before  Janu- 
ary i,  1917  might  obtain  a  five-year  exemption  on  the  pay- 
ment of  three-fourths  of  one  per  cent.5 

3.    EFFECT  OF  SEPARATION  ON  THE  LOCAL  FISCAL  SYSTEM 

The  localities  find  the  present  system  far  from  satisfac- 
tory. Some  cities  have  raised  their  rates  of  assessment 
slightly.  In  New  York  City  the  rate  has  been  raised  to 

1  Sowers,  op.  cit.,  p.  177  et  seq. 

*  New  York  Highway  Law,  1915,  sec.  282. 

8  Conference,  1912,  p.  251. 

4  Ibid.,  1913,  p.  151  et  seq. 

5  Ibid.,  1916,  (1917),  p.  400. 


359]  SEPARATION  IN  NEW  YORK  65 

approximately  100  per  cent.  This  has  been  done  because 
of  the  ten  per  cent  debt  limit,  but  such  action  would  not  have 
been  taken  if  there  had  been  any  expectation  of  a  return  to 
the  state  direct  tax.  Aside  from  this  important  exception 
there  is  little  indication  that  separation  is  responsible  for 
any  appreciable  advance  in  the  ratios  of  assessment.  Rural 
districts  still  assess  at  ratios  averaging  about  70  per  cent. 
But  it  is  the  taxation  of  personalty  which  causes  the  most 
dissatisfaction.  Not  only  are  there  varying  ratios  of  as- 
sessment for  different  classes  of  property  in  the  same  dis- 
trict, but  also  there  are  varying  ratios  for  the  same  classes  of 
property  in  different  districts,  and  even  within  the  same  dis- 
trict; further  much  taxable  wealth  evades  the  tax  entirely, 
and  much  is  exempted  which  should  be  taxable.  The  per- 
centage of  the  total  assessment  roll  represented  by  personal 
property  varied  from  less  than  one  per  cent  to  over  21  per 
cent  in  fifty-three  cities  of  the  state  investigated  in  1915. 
Less  than  one-fourth  of  these  cities  obtain  more  than  $2,000 
from  personal  property.1  The  rapid  growth  of  expendi- 
tures greatly  aggravates  these  inequalities.  But  the  evils 
of  this  system  are  the  evils  of  the  general  property  tax,  not 
of  separation.  It  is  of  course  conceivable  that  if  the  state 
depended  more  largely  on  the  general  property  tax  it  would 
have  more  effective  central  supervision  although  as  a  matter 
of  fact  the  state  general  property  tax  has  not  in  the  past 
brought  effective  state  control  with  it.  The  state  has  the 
power — and  perhaps  the  duty — even  though  it  derives  no 
revenue  from  the  general  property  tax,  to  supervise  local  as- 
sessments ;  but  with  no  direct  financial  interest  it  has  not  the 
incentive  which  it  otherwise  would  have,  and  it  may  be  that 
state  control  has  developed  more  slowly  than  it  would  have 
with  a  large  state  direct  tax.  New  York  state  has  never  for 

1  Joint  Legislative  Committee,  1916,  p.  69. 


66      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [360 

long  been  wholly  independent  of  the  general  property  tax. 
It  is  impossible  to  say  whether  or  not  greater  dependence  on 
this  source  would  have  brought  more  effective  supervision 
of  local  revenues. 

It  can  be  said,  however,  that  separation  has  brought  cer- 
tain concrete  gains  to  the  localities.  Unlike  Connecticut, 
Vermont  and  California,  no  property  has  been  removed  from 
local  taxation,  except  certain  securities,  which,  though  form- 
erly taxable  by  the  localities,  were  of  little  consequence  since 
most  of  them  escaped.  Following  the  enactment  of  the  se- 
cured debts  tax  of  1911  the  assessed  value  of  personalty 
taxed  locally  for  local  purposes  fell  five  per  cent  below  that 
of  the  previous  year  and  between  1911  and  1912  it  fell 
three  per  cent.1  To  what  extent  this  decrease  is  due  to 
the  exemptions  resulting  from  this  law  cannot  be  ascer- 
tained. The  assessed  value  of  personal  property  is  subject 
to  violent  fluctuations  entirely  apart  from  exemptions.  Be- 
tween 1900  and  1905,  before  any  exemptions  had  been  made, 
the  variations  ranged  from  a  ten  per  cent  decrease  to  a  22 
per  cent  increase.  The  removal  of  mortgages  from  local 
assessment,  1906,  caused  a  somewhat  heavier  decrease;  but 
the  localities  suffered  no  loss  in  consequence,  since  half  of 
the  mortgage  tax  was  refunded  to  them.2  To  the  extent 
that  the  state  has  gone  elsewhere  for  its  revenues  the  local 
tax  system  and  the  local  taxpayers  have  benefited.  And 
since  all  of  the  figures  indicate  that  the  owner  of  tangible 
personalty,  as  compared  with  the  owner  of  intangibles,  such 
as  corporate  stock,  was  unjustly  burdened,  the  change  was 
beneficial.  Assuming  that  the  revenue  now  derived  by  the 
state  from  special  sources  would  have  been  obtained  in  the 
absence  of  these  from  the  general  property  tax,  the  taxes  on 

1  Cf.  discussion  in  Conference,  1913,  pp.  203-204. 

2  Report  of  the  New  York  State  Tax  Commissioners,  1906,  p.  12. 


361]  SEPARATION  IN  NEW  YORK  67 

general  property  were  in  1911  approximately  12  per  cent 
less  than  they  would  have  been  under  the  old  system.  The 
actual  gain  to  the  taxpayer  in  1915  was  thirty  cents  on  $100 
of  taxable  property.  All  of  this,  of  course,  he  pays  to  the 
state  in  other  forms,  such  as  taxes  on  transfers,  or  on  in- 
tangibles which  before  evaded  the  tax.  But  the  new  taxes, 
in  so  far  as  they  are  based  on  income,  as  is  the  gross  earn- 
ings tax,  or  are  progressive,  as  is  the  inheritance  tax,  or 
reach  intangibles  which  before  escaped,  more  nearly  accord 
with  ability. 

Concerning  the  other  side  of  local  taxation  under  separ- 
ation, viz.,  the  tendency  toward  extravagance  which  might 
result  from  the  removal  of  the  state  direct  tax,  it  is  difficult 
to  draw  any  conclusions.  The  localities  depend  on  the  gen- 
eral property  tax  for  from  seventy  to  eighty  per  cent  of  their 
revenues.1  So  it  has  been  the  property  tax  that  has  in  large 
measure  borne  the  burden  resulting  from  the  rapid  growth  of 
local  expenditures  in  recent  years.  Such  phenomenal  growth 
is  apparent  in  all  of  the  states,  being  quite  as  characteristic 
of  those  without  separation  as  of  those  with.  An  increase 
in  unnecessary  and  undesirable  expenditure  might  take  place 
when  reductions  in  the  state  tax  were  made,  but  the  very 
rapid  advance  of  the  past  few  years  in  New  York  began 
shortly  before  1900,  when  the  state  tax  was  still  nearly  three 
mills,  and  has  not  lessened  with  the  return  to  this  tax  in  the 
last  six  years.2  This  does  not  suggest  that  local  officials 
have  attempted  to  take  advantage  of  the  change. 

4.    EFFECT  OF  SEPARATION  ON  THE  STATE  FISCAL  SYSTEM 

The  new  scheme  of  taxation,  inaugurated  in  1880,  and 
since  readjusted  and  enlarged  as  the  exigencies  and  whims 
of  a  moment  dictated,  is  far  from  satisfactory.  The  state 

1  Computed  from  data  in  Wealth,  Debt  and  Taxation,  1913,  vol.  ii. 
*Cf.  data  in  Annual  Report  of  the  Comptroller,  1916,  pp.  132-135. 


68      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [362 

drifted  toward  separation  as  the  line  of  least  resistance. 
The  absence  of  restrictions  in  the  constitution  made  special 
taxes  possible,  and  they  were  found  to  be  productive  and 
easy  to  exact.  But  such  a  planless,  patchwork  system,  if 
system  it  may  be  called,  could  not  bring  equality.  It  was 
developed  according  to  no  consistent  or  clearly  denned  prin- 
ciples, and  it  had  no  purpose  other  than  that  of  obtaining 
sufficient  revenues  to  meet  immediate  demands.  These  rev- 
enues it  did  for  a  time  realize.  The  legislature  continued 
occasionally  to  make  appropriations  without  authorizing  suf- 
ficient taxes  to  meet  them,  but  in  spite  of  this  the  debt  was 
practically  cancelled  by  1892,  and  however  great  the  dis- 
satisfaction caused  by  the  inequalities  of  the  tax  burden,  the 
good  financial  condition  of  the  state  invited  delay  in  remedy- 
ing them.  In  1906  it  was  found  unnecessary  to  levy  a  state 
direct  tax,  and  though  the  debt  was  now  again  growing 
rapidly  the  state  revenues  were  so  large  that  the  tax  com- 
missioners even  considered  the  problem  of  distributing  a  sur- 
plus among  the  localities.  Such  a  surplus  did  not  material- 
ize, however,  and  in  a  few  years  the  enormous  increase  in 
the  debt  placed  heavier  demands  on  the  financial  system  than 
it  could  meet.  In  1911  it  was  found  necessary  to  return  to 
the  direct  tax,  which  has  since  supplied  a  large  proportion 
of  the  state  revenues.1  Until  some  decisive  action  is  taken 
to  obtain  revenues  in  some  other  way  this  must  continue  and 

1  Comparison  of  Direct  Taxes   and  Total  State  Taxes,  New  York, 
1911-1916.* 

Year  Trtal  Tax  Direct  Tax 


I9II  ......  $41,473,377  $6,072,766                                                    14.6 

1912......  54,73°>57°  11,022,987                       20.1 

1913  ......  50,431,940  6,460,093                        12.8 

1914  ......  42,588,418  ......... 

1915  ......  61,244,030  20,519,716                        33.5 

1916  ......  53»6o4,o55  ......... 

*  Compiled  from  Reports  of  the  State  Tax  Commissioners. 


363]  SEPARATION  IN  NEW  YORK  69 

increase.  It  was  estimated  in  1915  that  the  state  would 
need  in  the  immediate  future  from  twenty  to  thirty  million 
dollars  more  revenue  than  the  present  system  has  been 
yielding.1 

Thus  the  state  has  failed  to  obtain  sufficient  revenues 
without  the  general  property  tax.  The  rapid  rise  in  ex- 
penditures, due  in  large  part  to  the  interest  on  the  huge  canal 
and  highway  debts,  far  exceeded  the  yield  of  the  regular 
state  sources,  and  there  was  no  elastic  tax  to  meet  the  need. 
This  increased  expenditure  may  be  extravagant,  though  the 
great  increase  in  apparently  desirable  state  activities  suggests 
that  for  the  most  part  it  is  not;  but  whether  extravagant 
or  not  it  is  not  due  to  separation.  There  is  no  apparent 
relation  between  expenditure  and  the  amount  of  the  direct 
tax  in  New  York.  The  recent  very  rapid  rise  began  about 
1902  while  there  was  still  a  state  direct  tax  and  with  the  re- 
turn to  the  direct  tax  there  has  been  no  sign  of  retrench- 
ment.2 Such  rapid  increase  is  characteristic  of  all  of  the 

1  Conference,  1915,  p.  127. 

3  INCREASE  IN  ORDINARY  EXPENDITURES  SINCE  1908.* 

v  Percentage  of  Increase  Over 

Year  Precediu? 

1909  15 

1910  10 

1911  2 

1912  15 

1913  6 

1914  2 

1915  II 

1916  5* 

1917  I2b 

1918  13' 

*  Annual  Report  oj  the  Comptroller,  /<?/7,  pp.  364-305;  Annual  Tabulation 
of  Statements  of  Desired  Appropriations  .  .  .  iqib,  pp.  ic-n;   Ibid.,  1915*  p.  II. 

*  For  nine  months  only,  owing  to  change  in  fiscal  year. 
b  Based  on  appropriations,  not  expenditures. 

c  Estimated  from  appropriations  requested  for  the  years  1917  and  1918. 


70      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [364 

states  in  recent  years, — those  depending  on  the  general  prop- 
erty tax  for  most  of  their  revenues  no  less  than  those  re- 
stricting its  use. 

With  respect  to  the  readjustment  of  the  burden  of  taxa- 
tion under  separation  some  gains  have  been  realized,  al- 
though there  is  still  much  to  be  desired.  There  has  been  no 
great  improvement  in  administration.  The  assessed  value  of 
property  varies  from  52  to  93  per  cent  of  real  value  between 
the  different  counties,  which  is  about  the  usual  variation, 
and  within  the  counties  the  differences  are  even  greater. 
According  to  the  state  board  of  equalization  the  average 
ratio  of  assessed  to  true  value  of  realty  was  86  per  cent  in 
I9I5.1  The  need  of  enlarged  powers  of  the  tax  commis- 
sioners is  imperative.  The  power  to  order  reassessments 
when  necessary,  and  the  removal  from  local  jurisdiction  of 
the  assessment  of  the  property  of  public  utilities  would 
benefit  much ; 2  but  so  far  apparently  the  incentive  to  obtain 
low  rates  of  assessment  on  real  estate  and  to  evade  alto- 
gether the  tax  on.  personalty,  which  comes  with  the  rise  in 
the  tax  rate,  has  more  than  offset  the  gains  from  improved 
administrative  machinery,  and  it  is  doubtful  if,  with  the 
present  heavy  taxes,  changed  administrative  methods  will 
be  effective.  According  to  the  recent  report  of  the  Joint 
Legislative  Committee  a  personal  property  tax  at  a  two 
per  cent  rate  cannot  be  generally  enforced  and,  in  the  few 
cases  where  it  is  levied,  is  most  unjust.3  The  average  tax 
rate  for  the  state  for  the  year  1914  was  $1.90  per  $100, 
varying  from  $1.77  to  $6.56.*  Thus  little  gain  has  been 

1  The  high  average  is  due  to  the  fact  that  two-thirds  of  the  value  of 
real  estate  is  in  the  City  of  New  York,  where  assessments  are  much 
nearer  full  value  than  elsewhere  in  the  state. 

2  Conference,  1913,  p.  188. 

3  Joint  Legislative  Committee,  1916,  p.  9. 

4  Computed  from  data  in  Report  of  Tax  Commissioners,  1914,  p.  55. 


365]  SEPARATION  IN  NEW  YORK  jl 

realized  from  administrative  reform,  and  little  apparently 
can  be  hoped  for  unless  by  this  means  the  base  of  the  tax  is 
sufficiently  broadened  to  permit  a  decided  decrease  in  the 
rate. 

But  the  burden  of  taxation  has  been  in  part  shifted  from 
the  general  property  tax  to  specific  taxes,  and  in  so1  far  as 
this  has  occurred  the  change  has  been  advantageous  to  the 
owners  of  real  estate,  for  it  means  a  lightening  of  the  bur- 
den on  realty  at  the  expense  of  personalty.  Realty  still 
bears  the  larger  share,  however.  It  is  generally  conceded 
that  taxable  personalty  equals,  if  it  does  not  exceed,  taxable 
realty  in  value,  and  that  the  ratio  oi  personalty  to  realty — 
taxable  as  well  as  total— is  rising.1  Yet  in  1915  the  person- 
alty assessed  under  the  general  property  tax  (including  bank 
stock)  was  only  eight  per  cent  of  the  total  assessment  roll.2 
In  1905,  before  any  personalty  had  been  removed  from 
local  assessment,  this  equaled  ten  per  cent.  In  1870  it  was 
twenty-two  per  cent.3  The  personalty  remaining  under  the 
general  property  tax  is  escaping  in  increasing  amounts.  More 
special  taxes  are  needed.  It  was  estimated  in  1913  that 
approximately  $10,000,000,000  in  personalty  was  not  taxed 
at  all.4  Of  course  if  this  were  actually  reached  there  would 
be  many  cases  of  double  taxation,  but  such  double  taxation, 
e.  g.,  of  bonds  and  of  the  property  which  they  represent,  is 
consistent  with  the  present  tax  law.  Under  present  condi- 
tions the  general  property  tax  is  little  more  than  a  realty  tax. 
And  only  in  so  far  as  special  taxes  are  employed  to  reach 
personalty  is  realty  relieved.  In  1915  special  taxes  yielded 
approximately  $37,000,000.  To  this  extent  the  new  system 
is  advantageous.5 

1  Report  of  Joint  Legislative  Committee,  1916,  p.  67. 

2  Report  of  the  Tax  Commissioners,  1915,  pp.  56-57. 

3  Computed  from  data  in  Report  of  Tax  Commissioners,  1915. 

4  Conference,  1913,  p.  148. 

6  Cf.  Report  of  State  Comptroller,  1916,  p.  127. 


72      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [366 

There  has  been  keen  competition  from  neighboring  states 
for  the  large  corporate  wealth  operating  in  New  York.  The 
ease  with  which  many  corporations  can  move  to  New  Jersey 
or  Connecticut,  owing  to  the  location  of  the  City  of  New 
York,  has  made  such  competition  serious.  Furthermore, 
New  Jersey  and  Delaware  have  done  much  to  encourage  the 
incorporation  of  companies  within  their  borders.  This  has 
made  taxation  very  difficult,  and  the  special  taxes  have 
failed  to  meet  the  situation.  With  the  exception  of  the  in- 
heritance, motor-vehicle,  excise  and  stock-transfer  taxes, 
which  are  apparently  both  equitable  and  lucrative,  they  are 
most  unsatisfactory.  The  mortgage  tax  is  attacked  on  the 
ground  that  no  consideration  is  taken  of  the  length  of  time 
the  mortgage  is  to  run,  thus  placing  a  heavier  burden  on  the 
short-term  mortgage.1  This  might  easily  be  remedied.  The 
secured-debts  tax  was  objected  to  because  it  subjected  this 
class  of  property  to  a  very  low  tax  which  exempted  it  for- 
ever from  local  taxation.  Since  this  wealth  was  for  the 
most  part  evading  local  taxation  this  objection  was  hardly 
valid;  but  the  small  amount  of  revenue  produced  and  the 
widespread  feeling  that  it  discriminated  unfairly  in  favor 
of  the  holders  of  such  property,  led  to  its  amendment  in 
1916.  The  methods  of  corporation  taxation  are,  with 
reason,  the  most  severely  condemned.  The  taxes  on  banks 
and  insurance  companies  are  held  to  be  too  low  ;  the  capital 
stock  tax  is  declared  to  be  unequal  and  inconsistent  —  the 
provisions  being  such  that  some  wealth  is  exempt  while 
other  wealth  of  the  same  kind  is  subject  to  taxation;  2  the 
exemption  of  mining,  laundering  and  manufacturing  cor- 
porations, particularly  the  last,  is  inexcusable.3  New  York 
is  the  leading  state  in  manufacturing,  yet  manufactures  pay 
a  smaller  percentage  of  the  states  taxes  than  in  any  other  of 


1  Conference,  1913,  pp.  150-151.  2/foW.,  p.  86  et  seq. 

3  Ibid.,  p.  90. 


367]  SEPARATION  IN  NEW  YORK  73 

the  important  manufacturing  states,  except  Pennsylvania. 
More  than  this,  in  New  York  the  ratio  of  the  percentage 
of  total  revenues  paid  by  manufactures  to  the  percentage  of 
total  wealth  invested  in  manufactures  is  smaller  than  in  any 
other  state.1  The  assessment  of  the  special  franchise  apart 
from  the  rest  of  the  corporate  property  is  impossible.  The 
local  taxation  of  capital  stock  is  a  farce.  Local  assessment 
of  the  real  estate  of  public  utilities  is  absurd.  Such  are 
some  of  the  objections,  and  they  are  serious  ones.  Simplifi- 
cation, centralization,  and  uniformity  are  sadly  needed.  But 
there  is  no  reason  why  they  should  not  be  realized.  Sep- 
aration does  not  prevent  their  attainment.  California  under 
complete  separation  has  met  these  difficulties  with  fair  suc- 
cess. With  the  equalization  of  these  corporation  taxes 
through  a  gross  or  net  earnings  tax,  revenues  could  be 
greatly  increased  without  in  the  least  injuring  the  taxpay- 
ers. Taxes  in  New  York  are  very  high,  but  wealth  in  New 
York  is  enormous.  It  is  the  inequalities  rather  than  the 
amount  of  the  taxes  that  work  hardship.  The  Joint  Legis- 
lative Committee  has  recommended  to  cure  these  inequal- 
ities (i)  the  abolition  of  the  personal  property  tax;  (2)  the 
withdrawal  of  general  business  corporations  from  the  cap- 
ital stock  tax;  and  (3)  the  imposition  of  an  income  tax  on 
individuals  and  general  business  corporations.2  Such 
changes,  in  addition  to  obtaining  greater  justice,  ought 
greatly  to  increase  the  yield  of  revenue;  and  an  increase  in 
revenue  would  again  permit,  for  a  time  at  least,  the  aboli- 
tion of  the  direct  tax. 

In  spite  of  their  defects  the  present  special  taxes  are 
reaching  wealth  far  better  than  the  general  property  tax 
alone  could  have  done.  It  has  been  estimated  that  to  obtain 
the  same  amount  of  revenue  from  personalty  as  was  ob- 

1  Joint  Legislative  Committee,  p.  132.  2 Ibid.,  p.  207. 


74      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [368 

tained  from  special  taxes  in  1912  would  have  required  a  two 
per  cent  rate  on  a  personalty  assessment  roll  nearly  three 
times  as  large  as  the  largest  ever  known  in  the  state.1  It  H 
scarcely  conceivable  that  this  could  have  been  obtained 
under  the  general  property  tax.  The  continuing  inequalities 
in  assessment,  which  persist  in  spite  of  improved  adminis- 
trative laws  and  the  efforts  of  the  tax  commissioners,  and 
the  increasing  escape  of  personalty  throw  the  burden  of  the 
general  property  tax  more  and  more  on  real  estate.  If  the 
present  amount  of  revenue  from  special  taxes  could  be  de- 
rived from  the  general  property  tax  the  burden  on  real 
estate  would  be  intolerable.  Real  estate  is  already  paying  a 
heavy  tax,  amounting  in  New  York  city  to  from  thirty  to 
forty  per  cent  of  its  net  income.2 

Whatever  the  inequalities  of  the  new  system,  they  are 
less  flagrant  than  those  of  the  former  system.  Separation 
has  brought  no  new  evils.  It  has  cured,  or  at  least  amelior- 
ated, some  of  the  old.  But  there  is  one  defect  which  has  so 
far  prevented  the  continuance  of  separation.  Having  given 
up  the  general  property  tax,  the  state  is  left  with  no  elastic 
tax,  and  without  one  it  is  exceedingly  difficult  to  make 
revenues  conform  to  needs.  This  difficulty  has  not  been 
surmounted  in  New  York.  Hence  it  has  been  found  im- 
possible to  enjoy  permanent  separation  of  revenues. 

1  Conference,  1913,  pp.  198-199. 

*  Joint  Legislative  Committee,  pp.  17-18. 


CHAPTER  V 

SEPARATION  IN  CONNECTICUT 
I.  HISTORY  OF  TAXATION  IN  CONNECTICUT  BEFORE  1889 

SEPARATION  was  introduced  into  Connecticut  by  legisla- 
tive act  in  iSQO.1  Previous  to  this  date  the  direct  tax,  while 
declining  in  importance,  had  been  regularly  employed. 
Until  1819  the  direct  tax  had  taken  the  form  of  a  tax  on 
incomes,  only  a  part  of  which — that  representing  gains  from 
business  and  professions  —  was  estimated  by  assessors.2 
The  income  from  real  estate  was  determined  by  the  law 
itself,  which  classified  land  and  buildings  and  estimated  in- 
comes accordingly.3  Over  these  the  assessor  had  no  con- 
trol, and  whatever  inequalities  may  have  existed — and  under 
such  crude  classification  there  must  have  been  many — were 
between  individuals  and  not  localities,  and  the  vexing  prob- 
lem of  the  state  equalization  of  assessments  did  not  arise. 

But  following  the  adoption  of  the  state  constitution  of 
1819  the  tax  system  was  changed.  Capital  value  was  sub- 
stituted for  income  as  the  base  of  the  tax,4  and  the  deter- 
mination of  such  value  was  placed  in  the  hands  of  local 

1  Report  of  the  Treasurer  for  1890  (Hartford,  1890),  p.  7.  (There 
are  no  constitutional  limitations  on  taxation  in  Connecticut.) 

"Report  of  Special  Commission  on  Taxation  in  Connecticut  (New 
Haven,  1887),  p.  9  ct  scq. 

3  Land  was  valued  according  as  it  was  classified  as  meadow,  plough- 
land,   pasture,  wood-lots, — and   buildings   according  to    size,   materials 
and  number  of  fire-places.     (Report  of  Special  Commission,  pp.  9-10.) 

4  Ibid.,  p.  10. 

369]  75 


76      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [370 

assessors,  state  and  local  divisions  alike  using  the  same 
valuations.  The  statute  provided  for  assessment  at  fair 
market  value,  but  little  effort  was  made  to  enforce  it.  In- 
equalities arose  at  once.  The  practice  of  assessing  property 
at  two-thirds  of  its  market  value,  or  even  lower,  became 
general,  and  not  only  did  different  assessors  employ  differ- 
ent rates  but  the  same  assessors  used  different  rates  for 
different  classes  of  property.  In  1821,  when  the  new  sys- 
tem had  been  in  operation  only  two  years,  a  state  board  of 
equalization  composed  of  the  treasurer  and  the  comptroller 
was  created  to  remedy  matters.1  These  officers,  although 
given  the  power  to  raise  or  lower,  in  part  or  as  a  whole,  the 
assessment  lists  of  the  towns  (the  local  units  of  assess- 
ment), accomplished  nothing — for  they  had  many  other 
duties  to  perform,  and  were  not  authorized  to  visit  the  dif- 
ferent towns  for  purposes  of  assessment. 

With  the  hope  of  improving  matters  a  committee,  ap- 
pointed by  the  general  assembly,  made  an  investigation  in 
1843  and  J844,  but  concluded  that  the  serious  inequalities 
lay,  not  between  different  towns,  since  the  state  tax  was 
relatively  light,  but  between  different  individuals;  and  pro- 
posed as  a  remedy  the  abolition  of  the  state  board  of  equal- 
ization and  the  valuation  of  property  by  the  owners  them- 
selves— such  valuations  being  made  public.2  No  action  was 
taken  on  these  recommendations.  Taxation  was  not  yet  so 
burdensome  that  inequalities  were  deeply  felt 

In,  1866  again  an  attempt  was  made  to  render  the  state 
board  of  equalization  effective.3  A  commissioner  from 
each  senatorial  district  was  appointed  to  examine  the  grand 
lists  of  the  district,  and  if  necessary  to  make  a  personal  in- 
vestigation of  the  property  itself,  reporting  the  facts  to1  the 

1  Report  of  Special  Commission,  p.  10. 

2  Ibid.,  p.  ii.  zlbid.,  p.  12. 


371  ]  SEPARATION  IN  CONNECTICUT  77 

board.  The  next  year,  1867,  these  district  commissioners 
were  dropped  from  the  state  board  of  equalization,  but  were 
required  to  assess  (together  with  a  selectman  from  each 
town)  representative  homesteads  and  farms.  The  value  of 
all  property  was  then  estimated  on  the  basis  of  these  valua- 
tions. These  estimates  were  then  compared  with  those  of 
the  assessor  and  reported  to  the  comptroller.  But  these 
changes  accomplished  nothing,  the  local  officers  appointed 
to  investigate  being  subject  to  the  same  influences  as  the 
local  assessors  to  keep  valuations  low.  The  act  was  re- 
pealed in  1 87 1.1 

A  commission  of  investigation  which  was  appointed  at 
the  same  time,  1867,  appreciating  this  difficulty,  recom- 
mended centralization  through  a  state  tax  commissioner 
with  power  to  appoint  the  assessors  for  each  town.  This 
latter  recommendation  was  before  the  assembly  again  in 
1876  and  once  more  (by  approval  of  a  temporary  tax  com- 
mission) in  1 88 1  but  was  not  adopted.  A  fourth  attempt  in 
1887  was  also  unsuccessful,  and  not  until  1905  was  this 
step  finally  taken.  The  tax  commissioner  then  appointed 
was  granted  the  power  to'  visit  towns  to  make  his  investiga- 
tions, but  not  to  appoint  assessors,  there  being  no  state 
direct  tax  at  this  time.2  After  1887  no  more  investigating 
commissions  were  appointed,  and,  failing  to  obtain  central 
control,  those  seeking  reform  turned  to  separation,  by  which 
it  was  hoped  to>  obtain  equal  assessments,  or  at  least  to 
avoid  the  injustice  of  unequal  assessments.3 

The  special  commission  reporting  in  1887,  which  recom- 
mended the  creation  of  a  tax  commission,  had  disapproved 
of  the  removal  of  the  state  direct  tax,  which  it  considered 
to  be  a  check  on  extravagance,  but  its  investigations  showed 

1  Report  of  Special  Commission,  p.  14. 

2  Tax  Law  of  Connecticut,  1906,  sec.  2413. 

3  Governor  Bulkeley,  Message  to  the  General  Assembly,  January,  1889. 


^S      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [372 

wide  variations  in  the  ratios  of  assessed  to  real  values  in 
the  different  towns  and  between  different  classes  of  prop- 
erty.1 To  avoid  this  evil  it  favored  apportionment  accord- 
ing to  population.  No  action  was  taken  upon  this  recom- 
mendation. 

In  1889  a  new  collateral  inheritance  tax  was  imposed, 
and  the  method  of  taxing  express,  telegraph  and  telephone 
companies  was  changed.  Also,  by  an  investment  tax  law, 
certain  personal  property,  before  escaping,  was  reserved 
exclusively  for  state  purposes.  These  changes  enabled  the 
general  assembly  to  authorize  the  treasurer,  June  22,  1889, 
to  suspend  the  state  tax  payable  in  November  1890.  The 
primary  purpose  of  this  measure  was  to  get  rid  of  unequal 
assessments.2 

For  nearly  twenty  years  following  this  change  it  was  not 
found  necessary  to  revert  to  the  direct  tax  for  state  reve- 
nues. Under  this  system  the  local  divisions  were  given  the 
general  property  tax  for  their  exclusive  use.  This  tax  they 
were  to  apply  to  all  property  not  specifically  exempted  from 
taxation  or  reserved  for  state  purposes. 

The  changes  made  by  separation  and  the  other  financial 
reforms  of  that  year  in  the  state  tax  system  were  not  rad- 
ical. The  loss  from  the  general  property  tax  was  in  large 
measure  offset  by  the  gains  from  the  new  collateral  inheri- 
tance tax  and  the  tax  on  choses  in  action.  Some  of  the 
corporation  taxes  were  considerably  altered  and  somewhat 
increased,  but  the  subjection  of  these  corporations  to  special 

xThe  average  was  67  per  cent.  In  one  case  unimproved  land  was 
assessed  at  33  per  cent,  improved  at  60  per  cent  of  actual  value.  Re- 
port of  Special  Commission,  p.  9. 

2  The  special  taxes  introduced  in  1889  and  the  changes  made  in  certain 
corporation  taxes  in  that  year  (which  made  it  possible  to  abolish  the 
state  general  property  tax)  were  the  direct  result  of  the  recommenda- 
tions of  the  Special  Commission  of  1887.  (Report  of  the  Special  Com- 
mission, passim.) 


373]  SEPARATION  IN  CONNECTICUT  79 

and  frequently  changing  state  taxes  was  an  old  story.1  The 
problem  of  reaching  corporations,  particularly  public  utili- 
ties, had  arisen  early  in  Connecticut,  and  special  state  taxes, 
first  in  addition  to,  and  later  in  place  of,  the  general  prop- 
erty tax,  were  devised  to  meet  the  situation. 

A  modest  beginning  was  made  in  1849,  when  a  state  tax 
was  imposed  on  shares  of  railroad  stock  owned  by  non- 
residents. The  following  year  the  rate  was  reduced  and 
the  tax  was  extended  to  all  shares,  wherever  owned.  In 
1862  the  rate  was  raised  and  horse  railways  were  included. 
Except  for  increases  in  rates,  in  1864  and  1865,  and  a  num- 
ber of  deductions,  which,  to  the  detriment  of  the  revenues 
obtained,  were  permitted  from  time  to  time,  the  tax  re- 
mained in  this  form  until  1889. 

Mutual  life-insurance  companies  and  savings  banks  were 
next  subjected  to  special  taxes.  In  1851  insurance  com- 
panies were  taxed  on  total  cash  capital  due  to  the  com- 
panies. The  rate  of  this  tax  has  been  changed  from  time 
to  time,  but  the  base  has  remained  practically  the  same. 
Fire-insurance  companies  were  added  in  1872. 

Savings  banks  were  taxed  on  deposits  in  1851  and  were 
exempted  from  other  taxes.  This  tax  still  continued  in 
1889,  although  the  rate  had  frequently  varied,  and  increas- 
ing deductions  had  been  made.  During  the  period  from 
1857  to*  1875  building  associations  were  included. 

The  pressure  for  funds  brought  about  by  the  Civil  War, 
which  resulted  in  raising  the  rates  of  the  special  taxes 
already  established,  also  led  to  the  introduction  of  new 
taxes.  First,  in  1862,  came  a  three-fourths  of  one  per  cent 
tax  on  telegraph  companies  on  all  property  within  the  state, 
to  be  in  lieu  of  all  other  taxes.  In  1864  this  was  changed 

1  For  a  detailed  history  of  the  development  of  corporation  taxes  see 
Report  of  the  Special  Commission  on  the  Taxation  of  Corporations, 
1913,  passim. 


go      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [374 

to  a  tax  on  every  message  sent  from  offices  within  the 
state.  The  next  year  a  third  form  of  taxation  was  tried, 
viz.,  one  on  all  gross  receipts  collected  within  the  state. 
This  remained  until  1889  when  a  fourth  method  was  intro- 
duced, a  flat  rate  per  mile  of  wire. 

In  1864  express  companies  were  singled  out  for  special 
taxation,  a  tax  on  gross  receipts  paid  within  the  state  being 
imposed  in  lieu  of  other  taxes.  The  rate  was  raised  in 
1865,  and  again  in  1889  when  the  tax  was  restricted  to 
gross  receipts  on  business  transacted  entirely  within  the 
state. 

Banks  were  chosen  for  special  legislation  in  1866,  when 
a  tax  was  imposed  on  the  market  value  of  stock  held  by 
non-residents, 

Not  until  1882  were  telephone  companies  sufficiently  de- 
veloped to  call  forth  special  legislation.  In  this  year  they 
were  removed  from  the  general  property  tax  and  a  tax  on 
gross  receipts  collected  within  the  state  was  imposed,  to  be 
abandoned  in  1889  for  a  flat  rate  of  seventy  cents  on 
transmitters  and  wire  per  mile. 

This  brief  account  shows  not  only  that  Connecticut  began 
early  the  taxation  of  corporations,  but  likewise  that  she 
had  experimented  even  before  1890  with  practically  every 
conceivable  type  of  special  corporation  taxes,  although  such 
public  utilities  as  car,  gas,  electric  and  water  companies, 
and  all  manufacturing  and  mercantile  corporations  were 
not  then  included. 

In  this  way  the  state,  during  the  forty  years  from  1849 
to  1889,  gradually  removed  from  local  taxation  and  appro- 
priated for  her  own  use  large  and  increasing  sources  of 
revenue.  The  readjustments  which  these  changes  necessi- 
tated in  the  local  tax  systems  could  not  have  been  serious — 
for  not  only  was  the  change  gradual,  but  the  sources  appro- 
priated were  for  the  most  part  unimportant  at  the  time  of 


375]  SEPARATION  IN  CONNECTICUT  gr 

appropriation,  either  being  undeveloped  or  evading  in  large 
part  the  local  assessor.  Moreover,  the  problem  of  local 
finances  only  became  acute  at  a  much  later  date. 

2.    TAX  SYSTEM  IN  1889 

The  local  systems  were  not  disturbed  when  separation 
was  accomplished  in  1889.  The  general  property  tax  sup- 
plied them  with  from  two-thirds  to  three-fourths  of  their 
revenue  at  this  time,  other  important  sources  being  local 
licenses,  state  subventions  for  education  and  poor  relief,  and 
earnings  of  institutions.1  The  changes  made  in  express, 
telephone  and  telegraph  taxes  in  this  year,  of  course,  had  no 
effect  on  the  localities,  since  these  sources  had  been  long 
since  removed  from  local  taxation.  And  of  the  two1  new 
state  sources  created,  the  inheritance  tax  exempted  no*  prop- 
erty from  local  taxation  while  the  low  rate  tax  of  two  mills 
on  choses  in  action,  although  nominally  withdrawing  a  con- 
siderable source,  in  reality  took  scarcely  anything,  since  the 
securities  reached  by  this  tax  had  before  largely  evaded  the 
local  assessor.  The  valuation  o<f  choses  in  action  listed  be- 
fore this  was  not  over  $3,000,000,  and  it  was  even  asserted 
in  1889  that  none  was  listed.2  Any  possible  loss  resulting 
could  be  easily  made  up  by  a  slight  increase  in  the  tax  on 
general  property,  a  move  readily  justified  because  of  the 
exemption  of  such  property  from  state  taxation. 

The  state  in  1889  was  deriving  22.9  per  cent  of  its  reven- 
ues ($441,000)  from  the  direct  tax,  and  the  remainder 
($1,482,900)  from  separate  sources.3  There  had  been  a 
tendency  toward  gradually  increasing  separation  since  1850, 

1  Quadrennial  Report  of  Indebtedness  and  Expenditures  of  Munici- 
palities (Hartford,  1888),  passim. 

2  D.  B.  Chapman,  "  Inequalities  of  Town  Taxation  in  Connecticut." 
A  paper  read  before  the  New  London  Board  of  Trade,  Feb.  12,  1889. 

3  Computed  from  data  in  Report  of  the  Treasurer  for  1889  (Hart- 
ford, 1889). 


82      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [376 

as  indicated  in  the  above  discussion  of  corporation  taxation, 
and  in  the  ten  years  preceding  1889  the  receipts  from  the 
general  property  tax  had  declined  absolutely  as  well  as 
relatively.1 

The  largest  separate  source  of  revenue  in  1879  was  the 
mutual  life-insurance  company  tax,  which  yielded  more  than 
one-third  of  the  revenues  from  separate  sources.  Railway 
taxes  came  second  in  importance,  and  the  tax  on  savings 
banks  and  savings  departments  of  trust  companies,  and  the 
military  commutation  tax  yielded  considerable  amounts,2 

In  1889  the  railway  tax  led  in  importance,  with  45.3  per 
cent,  with  the  savings  bank  and  trust,  and  the  mutual  life 
insurance  taxes  following,  with  16.2  per  cent  and  15.3  per 
cent,  respectively.3  The  marked  fall  in  the  receipts  from 
the  latter  was  due  to  a  decrease  in  the  rate.  The  commu- 
tation tax,  while  actually  yielding  larger  revenues  than  in 
1879,  was  proportionally  less.  During  this  entire  period 
the  taxes  on  express,  telephone,  telegraph  and  mutual  life 
insurance  companies  yielded  considerably  less  than  one  per 
cent  each. 

3.    HISTORY   OF   TAXATION   IN    CONNECTICUT   DURING   THE 
PERIOD  OF  COMPLETE  SEPARATION 

In  1891,  with  complete  separation  in  force,  the  state 
revenues  were  smaller  than  they  had  been  before — the  in- 
crease in  old  sources  and  the  yield  from  the  new  ($81,000 
from  choses  in  action  and  $74,800  from  inheritances)  be- 
ing less  than  the  lost  general  property  tax.  Owing  to  these 
changes  there  was  some  alteration  in  the  relative  amounts 

1  The  amount  of  the  tax  was  $485,700  in  1879,  or  32  per  cent  of  total 
revenues;  in  1889  it  was  $441,000  or  23  per  cent.  (Treasurer's  Report, 
1879,1889). 

3  Cf.  Treasurer's  Report,  1879. 

8  Computed  from  data  in  Report  of  the  Treasurer,  1889. 


377]  SEPARATION  IN  CONNECTICUT  83 

from  different  sources,  but  there  was  no  radical  change, 
and  in  1892,  when  the  new  system  was  fairly  well  adjusted, 
it  yielded  more  revenues  than  the  old.  The  yield  has  stead- 
ily increased  since.1 

The  changes  of  1889  were  only  one  step',  though  an  im- 
portant one,  in  the  improvement  of  Connecticut's  finances. 
The  effort  to  increase  the  yield  of  the  system,  and  at  the 
same  time  to  make  it  more  equitable,  continued. 

In  1893  the  tax  on  shares  of  stock  of  steam  and  horse 
railways  was  extended  to  the  stock  of  all  street  railways.  In 
1895  the  reimposition  of  the  direct  tax  was  considered,  such 
was  the  growing  need  of  funds,  but  no*  action  was  taken. 
The  choses  in  action  tax  was  doubled  this  year  and  brought 
some  relief.  In  1897  the  rate  on  inheritances  was  changed 
from  five  per  cent  on  bequests  over  $1,000  going  to  colla- 
teral heirs  to  three  per  cent  on  estates  above  $10,000;  and 
a  tax  of  one-half  of  one  per  cent  on  estates  going  to<  direct 
heirs,  the  same  exemption  being  observed,  was  added.  The 
one  per  cent  tax  on  the  market  value  of  the  stock  of  banks 
owned  by  non-residents  was  extended  in  1901  to  cover  all 
bank  stock,  and  in  addition  all  stock  insurance  companies. 
In  1903,  as  a  concession  to  equality,  the  tax  on  mutual  fire- 
insurance  companies  was  reduced  to>  one-fourth  o<f  one  per 
cent,  which  was  the  rate  on  mutual  life-insurance  companies. 
The  loss  in  revenue  was  negligible.  A  further  reduction  of 
revenue,  also  of  slight  importance,  followed  the  lowering, 
in  1905,  of  the  rate  on  express  companies  operating  on 
railways  within  the  state  from  five  to  two  per  cent.  Experi- 
ments in  the  taxation  of  estates  of  non-residents  were  tried 
from  1903  to  1907,  but  with  little  effect  on  revenue.2  In 
1907  the  telephone  tax  was  raised  through  advancing  the 
rate  on  transmitters  from  seventy  cents  to  $1.10. 

lCf.  Treasurer's  Report.  *  Conference,  1908,  p.  173  et  seq. 


84     SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [378 

But  all  of  these  changes  did  little  to  increase  revenues, 
and  extraordinary  expenditures,  beginning  in  1907,  made 
decisive  action  unavoidable.  Such  action  was  taken  by  the 
legislature  of  1909  which  reimposed  the  state  direct  tax 
which  had  been  suspended  twenty  years  before.  This  tax 
is  voted  biennially  by  the  state  legislature.  It  was  omitted 
by  the  legislature  of  1911  but  has  since  been  regularly 
authorized  and  there  seems  to  be  no  immediate  expectation 
that  it  will  be  given  up.  Thus  separation,  temporarily  at 
least,  has  been  abandoned. 

4.    EFFECTS  OF  SEPARATION  AND  RECENT  LEGISLATION 

The  only  local  effect  of  separation  in  Connecticut  was  to 
relieve  property  of  the  state's  share  of  the  general  prop- 
erty tax  which,  in  1888,  was  approximately  7.5  per 
cent  of  the  total  tax.  Since  real  estate,  particularly  land, 
was  undoubtedly  bearing  the  larger  share  of  the  tax,  the 
shifting  of  this  part  of  the  burden  to  other  sources  was  a 
relief  to  the  agricultural  districts.  The  actual  local  tax  in 
1892  was  indeed  higher  than  the  total  state  and  local  tax  in 
I888,1  but  this  was  apparently  due  only  to  normal  increase ; 
so.  while  the  burden  was  greater  in  1892  than  it  had  been 
in  1888,  it  was  unquestionably  less  than  it  would  have  been 
had  the  old  system  prevailed. 

There  is  no  indication  that  the  localities  took  advantage 
of  the  change  to  impose  excessive  taxes,  for  the  increase  in 
their  revenues  was  normal.  The  average  four-year  increase 
between  1876  and  1912  was  thirteen  per  cent.  Between 
1888  and  1892  taxes  rose  twelve  per  cent,  and  from  1892, 
thirteen  per  cent.2  Neither  is  there  any  indication  that  the 
ratio  of  assessed  to  real  valuations  was  raised.  The  rise 

1  Municipal  Debt  and  Expenditures,  1888,  1892. 

2  Computed   from   data  in  Municipal  Debt  and  Expenditures,   1888, 
1892,  1896. 


379]  SEPARATION  IN  CONNECTICUT  85 

in  the  grand  list  was  not  abnormal,1  but  there  was  the 
usual  advance  in  the  tax  rate.2  In  short,  the  local  revenue 
systems  were  unaffected  by  separation. 

The  primary  aim  of  separation  in  1889  was  to  get  greater 
equality  of  local  assessment  ratios,  or  at  least  to  avoid  the 
evils  of  inequality  and  to  do  away  with  the  need  of  state 
equalization.3  If  the  success  of  this  reform  is  to  be  meas- 
ured solely  by  its  accomplishment  in  this  respect  it  must  be 
considered  a  failure.  To  be  sure,  the  state  tax  of  one  mill 
(cf.  total  average  rate  on  rural  property  of  13.3  mills4  and 
total  average  rate  on  urban  property  of  24.3  mills)  was 
removed,  leaving  only  the  county  tax,  an  almost  negligible 
quantity — never  over  one  mill  and  generally  decidedly  less — 
to  be  apportioned  on  the  basis  of  town  assessments.  But 
this  was  the  only  gain. 

In  1907,  when  complete  separation  had  been  in  operation 
sixteen  years,  and  any  effects  on  assessed  valuations:  had 
had  ample  time  to  develop,  the  inequalities  of  assessment 
remained  nearly  as  great  as  ever.  They  are  not  so  serious 
as  in  many  states  but  they  have  not  been  much  diminished 
by  separation.  Twenty-eight  per  cent  of  the  towns  claimed 
assessments  at  one  hundred  per  cent  of  real  value,  but  more 
than  one-fourth  admitted  ratios  under  seventy-five  per  cent.5 

1  The  first  distinct  rise  in  the  grand  list  came  in  1896  when  the  state 
board  of  equalization  first  undertook  revaluation  for  purposes  of  state 
and  local  taxation. 
'Average  Tax  Rate* 

Year  Town  Borough  City 

1884 11.66  5.58  10.05 

1888 12.16  5.83  10.90 

1892 12.50  5.97  10.05 

*  Computed  from  data  given  in  the  Connecticut  Reports  on  Municipal 
Debt  and  Expenditure  of  these  dates. 
s  Supra,  p.  74. 

4  Computed  from  data  in  Municipal  Debt  and  Expenditure,  1888. 

5  Biennial  Report  of  the  Tax  Commissioner  (Hartford,  1908),  p.  4. 


86      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [380 

In  1909  fifty-four  towns  claimed  one  hundred  per  cent 
valuations,  but  the  state  board  of  equalization  found  cause  to 
make  additions  to  the  lists  of  all  but  nine  of  these.1  To  cite 
an  extreme  case  of  variation,  buildings  were  assessed  in  one 
town  in  this  year  at  33  per  cent  of  true  market  value,  in 
another  at  125  per  cent.  Further,  the  variations  between 
different  classes  of  property  in  the  same  town  were  very 
great.  Discrimination  in  favor  of  land  was  sometimes 
made.  More  often  land  was  discriminated  against.  Build- 
ings as  a  rule  were  assessed  at  a  slightly  lower  ratio,  while 
other  property,  if  it  did  not  escape  entirely,  was  usually 
assessed  much  lower.2 

Lengthening  the  term  of  office  of  the  assessors  from  one 
to  three  years,  and  additional  pressure  brought  to  bear  fol- 
lowing the  reimposition  of  the  state  direct  tax,  had  some 
effect,  so  that  in  1910  the  lists  of  over  one-fifth  of  all  of  the 
towns  were  accepted  unchanged  by  the  state  board  of  equal- 
ization. However,  even  in  1912,  although  it  was  claimed 
that  the  average  ratio  for  land  was  90  per  cent,  and  for 
buildings  89  per  cent,  there  were  instances  where  these  were 
assessed  as  low  as  50  per  cent.3  The  fact  that  the  board  of 
equalization,  since  1896,  has  added  anywhere  from  7.8  per 
cent  (1905)  to  23.4  per  cent  (1900)  to  the  grand  list  of 
the  towns  is  in  itself  very  significant.4 

The  average  rate  for  land  in  1908  was  approximately  86 
per  cent,  buildings  84  per  cent,  and  other  property  73  per 
cent.  This  has  been  slightly  raised  since,  so  that  now  it  is 

1  Biennial  Report  of  the  Tax  Commissioner  (Hartford,  1910),  p.  5. 

'Manufacturing  plants  were  especially  favored  at  this  time,  being 
commonly  assessed  at  25  per  cent.  Biennial  Report  of  the  Tax  Com- 
missioner, 1910,  p.  35. 

3  Information  Relative  to  the  Assessment  and  Collection  of  Taxes 
(Connecticut,  1913),  passim. 

'Reports  of  the  State  Comptroller,  1896-1916. 


381]  SEPARATION  IN  CONNECTICUT  87 

considerably  above  the  average  ratio  of  assessment  of  67 
per  cent  o-f  true  value  assumed  to  exist  in  1889.  But  the 
activities  of  the  board  of  equalization  since  1896  and,  more 
recently,  of  the  tax  commissioner,  especially  since  the  re- 
turn to  the  direct  tax,  are  largely  responsible,  although  the 
existence  of  separation  doubtless  made  the  labors  of  these 
officials  much  less  difficult.  Also  some  gain  was  realized 
through  separation  in  so  far  as  it  relieved  property  of  the 
inequalities  of  the  slight  state  tax. 

The  obvious  advantages  of  special  corporation  taxes  had 
already  been  realized  in  large  measure,  so  that  the  changes 
of  1889  made  no  real  progress  here,  although  the  new  taxes 
on  inheritances  and  certain  securities  were  a  step  in  advance. 

The  relief  to  agricultural  districts  due  to>  shifting  the  en- 
tire burden  of  state  revenue  from  general  property  to  spe- 
cific forms  of  property,  particularly  intangibles,  was  ob- 
tained. This  was  a  real  gain ;  and,  as  explained  above,1 
the  localities  did  not  take  advantage  of  it  to  raise  their  tax 
rates  unduly. 

Thus  it  is  seen  that  no  very  decided  advantages  were 
gained  from  separation.  On  the  other  hand,  only  one  of 
the  evils  generally  attributed  to  it,  viz.,  the  inelasticity  of 
such  a  system,  was  incurred. 

Extravagance  in  state  expenditure  was  not  encouraged 
by  the  lack  of  a  direct  tax.  On  the  contrary,  the  inelasticity 
of  the  system  apparently  acted  as  a  far  more  effective  check 
than  a  direct  tax.  The  new  system  supplied  sufficient  reve- 
nues for  some  time.  Although  the  state  was  forced  to  sus- 
pend its  policy  of  paying  off  the  debt  in  1892  and  in  1896 
the  treasurer  made  an  appeal  for  new  sources  of  revenue,2 
the  increase,  if  rather  small,  was  steady  year  by  year,  and 
the  state  eventually  succeeded,  not  only  in  keeping  expen- 

1  Supra,  p.  84.  2  Treasurer's  Report,  1896,  p.  6. 


88      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [382 

ditures  within  revenues,  but  also  in  continuing  to  pay  off 
the  debt.  No  sinking  fund  was  maintained,  but  an  increas- 
ing surplus  resulted  in  a  falling-off  of  the  net  debt  begin- 
ning with  1898.  The  reduction  of  the  funded  debt  was 
begun  in  1900,  and  so*  faithfully  was  this  policy  pursued 
that  the  debt  fell  from  $3,240,000  in  1899  to  $844,000  in 
I9O8.1  This  was  made  possible  in  part  by  the  restriction  of 
state  activities  .and  in  part  by  the  steady  growth  of  revenues, 
the  latter  being  due  rather  to  the  development  of  corpora- 
tions subject  to  state  taxation  than  to  changes  in  the  tax 
system.  Revenues  increased  fifty-six  per  cent  in  the 
period  1890  to  1905,  as  compared  with  thirty  per  cent 
from  1875  to  !89O.2  It  seems  safe  to  assume  that  this 
increase  was,  if  anything,  less  than  it  would  have  been 
under  a  direct  tax,  for  revenues  at  the  beginning  of  this 
earlier  period  had  been  forced  abnormally  high  to  meet  the 
heavy  debt  remaining  from  the  Civil  War.  Moreover,  the 
later  period  was  one  of  rapidly  growing  expenditure 
throughout  the  country.  Connecticut  was  not  obtaining 
excessive  revenues  and  was  not  pursuing  a  spendthrift 
policy;  but  rather  was  practising  strict,  possibly  even  un- 
wise, economy,  in  order  to  reduce  her  debt  and  keep  outgo 
below  income.  And  so  successful  was  this  policy  that  in 
1907  the  cash  balance  in  the  treasury  exceeded  the  funded 
debt  and  an  actual  surplus  was  realized. 

This  prosperous  condition  of  the  treasury  was  of  short 
duration.  That  same  year  the  legislature  authorized  bonds 
to  the  extent  of  $6,500,000  for  highways,  armories,  libra- 
ries and  other  public  buildings.  This  has  since  been  fol- 
lowed, under  protest  from  the  treasurer,3  by  the  authoriza- 

1  Treasurers  Report,  1899-1908. 

2  Computed  from  data  in  Treasurer's  Reports,  1875,  1800,  1905. 

3  Ibid.,  1912,  p.  6. 


383]  SEPARATION  IN  CONNECTICUT  89 

tion  of  further  issues,  until  the  funded  debt  in  1915  ex- 
ceeded $13,000,000. 

The  burden  of  interest  which  this  saddled  on  the  state, 
together  with  increases  in  appropriations  for  other  pur- 
poses, increased  expenditures  to  such  a  point  that  the  finan- 
cial system  of  the  state  was  unable  to*  meet  the  situation. 
Moreover,  the  freeing  of  the  toll  bridges  in  1907,  and  the 
changes  in  the  inheritance  tax,  and  military  commutation 
and  poll  tax,  of  1909,  only  aggravated  matters,  and  it  was 
found  necessary  to  resort  to<  temporary  loans.  Thus  the 
legislature  of  that  year  was  forced  to  authorize  the  levy  of 
a  direct  tax  of  1.5  mills  for  1910  and  1911  in  order  to 
alleviate  conditions. 

The  lack  of  an  elastic  source  of  revenue  was  the  real  de- 
fect of  separation.  The  direct  tax  was  not  continued  in 
1912  and  1913,  much  to  the  distress  of  the  treasurer,  but 
was  again  authorized  in  1914  and  1915  at  the  rate  of  one 
mill.  In  this  latter  year  it  supplied  17  per  cent  of  all  reve- 
nue, being  the  largest  single  source. 

In  spite  of  this  the  debt  has  continued  to  rise,  and  other 
revenue  sources  and  systems  have  been  eagerly  sought,  with 
the  result  that  in  1913  a  gross  earnings  tax  was  introduced  for 
telegraph  companies  at  3  per  cent,  telephone  companies 
at  4  per  cent,  and  car  companies,  which  had  never  before 
been  subjected  to  a  special  state  tax,  at  2  per  cent.  Also 
the  tax  on  gross  earnings  of  express  companies,  though  it 
was  reduced  to  2  per  cent  for  all  companies,  was  extended 
to  the  state's  share  of  gross  receipts  on  interstate  business.1 

These  changes  were  followed  in  1915  by  the  application 
of  the  same  gross  receipts  tax  at  the  rate  of  3.5  per  cent  to 
steam  railroads,  4.5  per  cent  to  electric  railroads,  and  1.5 
per  cent  to  gas,  electric  and  power  companies.  These  latter 

1  Conference,  1912,  p.  306. 


o/)      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [384 

were  not  removed  from  the  general  property  tax.  Manu- 
facturing and  mercantile  corporations  were  subjected  to>  a 
state  tax  of  2  per  cent  on  net  incomes  in  addition  to  the 
local  general  property  tax.  The  low  rate  tax  on  intangibles 
was  made  more  effective  by  attaching  a  10  per  cent  penalty 
to  estates  the  securities  of  which  had  been  evading  the  four- 
mill  tax.  Further,  apportionment  by  expenditure  was  in- 
troduced to  be  applied  to  the  direct  tax,  in  the  hope  of 
avoiding  the  injustice  of  unequal  assessments  and  gaining 
greater  equality.  And  to  prevent  the  danger  of  further  un- 
wise legislation  a  finance  board  was  created,  comprising 
thirteen  members  (three  citizens,  three  state  officials  and 
seven  members  o<f  the  legislature),  to  act  as  budget  com- 
mittee during  its  session.  All  appropriations  are  referred 
to  this  board  and  its  recommendations  are  reported  to  the 
legislature  for  action.  * 

Thus  while  continuing  to  increase  the  number  and  yield 
of  separate  state  taxes,  Connecticut  has  practically  aban- 
doned complete  separation.  Some  slight  relief  to  the  rural 
districts  was  obtained  by  this  system.  But  it  did  not  bring, 
of  itself,  as  had  been  hoped,  assessments  at  full  value,  and 
the  gain  which  it  did  realize  of  avoiding  some  of  the  evils 
of  these  inequalities  through  the  removal  of  the  state  tax 
can  be  attained  equally  well  through  apportionment  by 
expenditure. 

Separation  did  not  induce  extravagance,  nor  did  the 
localities  suffer,  but  the  inelasticity  of  state  revenues  under 
the  system  led  to  its  abandonment. 

The  direct  tax  is  authorized  by  the  legislature  for  only 
two  years  at  a  time,  and  of  course  may  at  any  time  be 
dropped,  particularly  if  the  new  sources  of  revenue  prove 
fertile.  But,  with  the  state  debt  growing  as  it  is  at  present, 

1  Conference,  1915,  p.  416. 


385]  SEPARATION  IN  CONNECTICUT  QI 

it  is  hardly  probable  that  the  direct  tax  will  be  omitted  for 
any  length  of  time.  If  some  other  elastic  source  were  sub- 
stituted, such  as  a  state  income  tax  (which  has  been  con- 
sidered), sufficient  revenues  might  be  produced  to  reestab- 
lish separation;  although  its  continuance  for  any  length  of 
time  would  be  doubtful  unless  the  rate  were  made  variable. 
It  does  not  seem  probable,  however,  that  such  a  tax  will  be 
introduced  in  the  near  future.  The  general  property  tax, 
since  the  adoption  of  apportionment  by  expenditure,  is  ap- 
parently giving  great  satisfaction.1 

Should  an  income  tax  be  introduced,  the  tendency  toward 
centralization  might  lead  very  possibly  to'  the  use  of  such 
a  tax  locally  as  well  as  by  the  state.  The  general  property 
tax  is  unsatisfactory  for  local  purposes,  and  it  is  not  in- 
conceivable that  the  localities  should  be  allowed  to-  make 
additions  to  a  state  income  tax  were  the  state  to  adopt  one. 

It  seems,  therefore,  improbable  that  complete  separation 
will  be  used  again  in  Connecticut  for  any  long  period  of 
time.  But  the  present  method  of  employing  a  large  number 
of  special  state  taxes,  which  entails  a  considerable  degree 
of  separation,  will  doubtless  be  retained  for  some  time,  and 
it  is  most  unlikely  that  the  state  will  ever  return  to  the  old 
general  property  tax  levied  on  the  basis  of  local  assessments. 
Separation,  as  suggested  above,2  has  been  used  as  a  step- 
ping-stone to  better  methods,  not  as  an  end  in  itself. 

1  According  to  the  tax  commissioner,  Mr.  William  H.  Corbin,  the  ex- 
tension of  the  income  tax  on  manufacturing  and  mercantile  corporations 
to  the  personal  property  of  these  corporations  now  subject  to  the  local 
general  property  tax  is  being  considered ;  but  there  is  no  expectation  of 
extending  it  further  than  this,  nor  of  giving  up  the  state  general  property 
tax  as  now  levied. 

2  Supra,  p.  ii. 


CHAPTER  VI 

PARTIAL  SEPARATION  IN  NEW  JERSEY 
I .  STATE  AND  LOCAL  TAX  SYSTEM 

NEW  JERSEY  has  levied  no  direct  tax  since  1884,  with  the 
exception  of  a  state  school  tax,  which  is  returned  entirely  to 
the  counties.  Before  1851  the  state  depended  for  the  most 
part  on  special  taxes.  These  first  took  the  form  of  taxes  on 
land — the  valuation  of  which  was  determined  by  law — per- 
sonal taxes,  and  taxes  on  special  forms  of  tangible  property. 
Later  bank  stock  was  reached,  and  then  other  intangibles. 
In  1851  most  of  the  special  taxes  were  replaced  by  a  general 
property 'tax,1  —  apparently  the  result  of  the  influence  of 
neighboring  states  and  pressure  for  increased  revenues,  al- 
though New  Jersey  never  became  as  seriously  involved  in 
debt  as  did  some  of  her  neighbor  states  during  the  period  of 
state  development  of  internal  improvements.  The  tax  was 
not  regularly  levied  until  the  time  of  the  Civil  War.  The 
proceeds  of  this  tax  were  at  first  diverted  for  the  most  part 
to  the  War  Fund;  later,  beginning  in  1872,  they  were  used 
principally  for  school  purposes,  and  after  1884  they  were  de- 
voted entirely  to  this  purpose.  But  for  nearly  twenty  years 
the  general  property  tax  was  also  an  important  item  in  the 
state  fund,  yielding,  in  1878,  49  per  cent  of  the  total  receipts 
of  that  fund. 

1  J.  M.  Mathews,  "  Tax  Administration  in  New  Jersey,"  Journal  of 
Political  Economy,  vol.  xx,  p.  725. 

92  [386 


387]          PARTIAL  SEPARATION  IN  NEW  JERSEY  93 

TABLE  IV1 

PERCENTAGE  OF  RECEIPTS  OF  THE  STATE  FUND  DERIVED  FROM  THE  GENERAL 

PROPERTY  TAX 

Date  State  Fund  General  Property  Tax        Per  cent  State  Fund 

1870 $868,800  $190,000  22 

1875 1,463,300  660,700  41 

1880 1,106,500  254,700  23 

1885 1,272,800  21,900*  2 

1890 1,830,900  

*  Deficiency  tax  (state  tax  of  1882). 

This  was  New  Jersey's  only  experience  with  a  general  prop- 
erty tax  for  state  purposes,  for  the  state  school  tax  may 
properly  be  considered  a  local  tax  since  the  counties 
get  it  all  back — and  nine-tenths  of  it  in  proportion  to  assessed 
valuations.  It  is  subject  only  to  the  objections  of  a  local  gen- 
eral property  tax,  and  not  to  the  additional  evils  to  which 
such  a  state  tax  is  liable.  Consequently  separation  of  rev- 
enues, practically,  if  not  technically,  is  complete.  The  state 
derives  its  income  almost  entirely  from  railroad,  canal  and 
other  corporation  taxes. 

A  tax  on  the  capital  stock  of  banks,  first  levied  in  1810, 
was  the  beginning  of  corporation  taxation  in  New  Jersey. 
It  was  a  tax  on  the  shareholders,  but  collected  through  the 
banks.  In  1826  foreign  insurance  companies  were  taxed  on 
gross  premiums,  and  later  domestic  insurance  companies 
were  taxed  on  capital  stock.2  In  1830  provision  was  made 
for  flat  rate  taxes  to  be  paid  by  railroad  and  canal  companies 
in  proportion  to  the  passengers  and  freight  carried.  This 
law  was  amended  many  times  and  by  1849  nacl  been  con- 
verted into  a  tax  on  cost  of  construction,  to  be  levied  an- 
nually on  all  railroads  and  canals  after  earnings  had  reached 
six  per  cent  of  such  cost.  The  provisions  for  the  enforce- 

1  Compiled  from  Annual  Reports  of  the  Comptroller  of  the  Treasury, 
1865-1890. 

2Mathews,  op.  cit.,  p.  724. 


94      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [388 

ment  of  this  act  were  so  ineffective  that  the  companies  were 
practically  permitted  to  assess  themselves.  In  1873  a  com~ 
missioner  of  railroad  taxation  was  first  appointed  to  make 
assessments  for  local  taxation  of  railroad  property  other 
than  the  "  main  stem,"  which  was  reserved  for  state  taxa- 
tion. In  1876  this  officer  was  superseded  by  a  board  of  rail- 
road commissioners  to  value  all  property,  and  the  state  tax 
was  thereafter  levied  on  "  true  value  "  instead  of  on  cost 
of  construction.1 

In  1884  the  railroad  and  canal  taxes  were  revised.  All 
property,  including  the  franchise,  was  made  subject  to  the 
state  tax  2  and  in  addition  real  estate  other  than  the  "  main 
stem  "  was  subjected  to  a  local  tax  at  the  rate  of  other 
property  locally  taxed,  but  not  to  exceed  one  per  cent.  In 
1897  the  state  revenues  from  that  real  estate  which  was  sub- 
ject both  to  state  and  local  taxation  were  turned  over  to  the 
localities.  In  1906  the  fixed  state  rate  was  replaced  by  a 
variable  rate  equal  to  the  average  tax  rate  on  property 
throughout  the  state.3  Except  for  some  minor  changes  in 
1908  this  tax  remains  today. 

Other  corporations  were  taxed  under  laws  of  1884  and 
1892.  At  present  there  is  a  state  franchise  tax  on  gross 
earnings  or  gross  premiums, — of  one-half  of  one  per  cent 
on  the  gross  earnings  of  gas  and  electric  companies  not 
using  the  public  highways ;  thirty-five  one-hundredths  of  one 
per  cent  on  gross  premiums  of  domestic  life-insurance  com- 
panies with  one  per  cent  additional  on  any  surplus ;  and  two 
per  cent  on  the  gross  earnings  of  certain  car  companies  and 
express  companies.4 

1  Mathews,  op.  cit.,  pp.  725-726. 

*  The  rate  remained,  as  it  had  been  before,  one-half  of  one  per  cent. 

3  Mathews,  op.  cit.,  p.  726. 

4  For  more  detailed  discussion  of  corporation  taxation  see  Wealth, 
Debt  and  Taxation,  vol.  i,  p.  595  et  seq. 


389]          PARTIAL  SEPARATION  IN  NEW  JERSEY  95 

All  domestic  corporations  not  paying  this  gross  receipts 
tax  or  the  local  gross  earnings  tax,  railroad  and  canal  com- 
panies, or  insurance  companies  subject  to  special  taxes,  are 
subject  to  an  annual  franchise  tax  of  one- tenth  of  one  per 
cent  on  capital  stock  issued  and  outstanding  up  to  three  mil- 
lion dollars.  All  capital  stock  between  three  and  five  million 
is  taxed  one-twentieth  of  one  per  cent  and  each  million  or 
fraction  thereof  above  five  is  taxed  a  flat  rate  of  $50. 
Manufacturing  and  mining  corporations  at  least  fifty  per 
cent  of  whose  capital  stock  is  invested  in  manufacturing  or 
mining  within  the  state  are  subject  to  no  special  tax.  Those 
with  less  than  fifty  per  cent  of  capital  stock  invested  within 
the  state  may  deduct  such  stock  from  total  stock  before  being 
subjected  to  a  special  tax. 

Foreign  fire-insurance  companies  are  assessed  two  per  cent 
on  gross  premiums,  with  a  retaliatory  tax  for  those  states 
with  higher  rates  than  New  Jersey.  Foreign  life-insurance 
companies  are  subject  only  to  the  retaliatory  tax.  All  others, 
except  domestic  life  insurance,  which  are  taxed  under  the 
state  franchise  tax  on  gross  earnings,  pay  two  per  cent  on 
gross  premiums. 

Corporations  are  also  subject  to  incorporation  fees  of 
twenty  cents  per  $1,000  authorized  capital  stock  (with  a 
minimum  of  $25),  and  consolidation  and  merger  corpora- 
tions pay  twenty  cents  per  $1,000  authorized  capital  stock 
beyond  the  capital  of  the  corporation  consolidated  (with  3 
minimum  of  $20).  Fees  are  also*  charged  for  extension 
of  corporate  existence,  dissolution  and  increase.  Foreign 
corporations  pay  a  $10  privilege  tax,  except  foreign  in- 
surance companies  which  pay  $20.  The  state  derives  over 
sixty  per  cent  of  its  revenues  (exclusive  of  the  railroad 
taxes  apportioned  to  the  counties  for  schools)  from  cor- 
porate taxes  and  fees.  The  state's  only  important  special 
tax  in  addition  to  those  on  corporations  is  the  inheritance 


96      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [390 

tax — a  collateral  tax  of  five  per  cent  on  estates  over  $500, 
and  a  direct  tax,  first  levied  in  1914,  of  from  one  to  four 
per  cent,  with  a  $5,000  exemption.1 

The  localities  rely  mainly  on  the  general  property  tax. 
The  counties  obtained  78  per  cent  and  other  local  divisions 
50  per  cent  of  their  revenues  from  this  source  in  IQI3.3 
Municipalities  have  in  addition  a  $i  poll  tax  on  all  males 
over  twenty-one  years  and  a  gross  earnings  tax  of  two  per 
cent  on  public  service  corporations,  excepting  street  rail- 
ways, which  pay  five  per  cent.  These  are  assessed  by  the 
state  board  of  taxes  and  assessment  and  the  tax  is  in 
addition  to  the  general  property  tax.  There  is  also,  since 
1914,  a  tax  of  three-fourths  of  one  per  cent  on  the  capital, 
surplus  and  undivided  profits  of  banks  and  trust  companies. 

2.    EFFECTS  OF  SEPARATION 

Owing  to  New  Jersey's  use  of  the  general  property  tax 
for  state  purposes  during  only  a  brief  and  abnormal  period 
it  is  impossible  to  compare  conditions  under  the  general 
property  tax  with  conditions  under  separation;  but  the  ten- 
dency toward  extravagance,  the  equitableness  of  the  present 
system,  the  extent  of  centralization  of  administration,  and 
the  relation  of  revenues  to  expenditures,  may  be  shown  ab- 
solutely, if  not  relatively. 

Considering  first  the  local  systems,  the  only  danger  of  ex- 
travagance or  misuse  of  revenue  which  can  be  attributed  to 
separation  is  at  the  time  of  the  change.  If  the  pressure  of 
the  general  property  tax  will  prevent  unnecessary  state  ex- 
penditure then  it  will  prevent  to  an  even  greater  degree  ex- 
cessive local  expenditure ;  for  the  general  property  tax,  even 
where  it  is  freely  used  by  the  state,  furnishes  a  larger  pro- 
portion of  local  than  of  state  revenue.  Only  when  the  re- 

1  Annual  Report  of  the  Comptroller  of  the  Treasury,  1915,  p.  xii. 

2  Computed  from  data  in  Wealth,  Debt  and  Taxation,  vol.  ii. 


39 1  ]          PARTIAL  SEPARATION  IN  NEW  JERSEY  97 

moval  of  the  state  tax  causes  a  considerable  reduction  of  the 
tax  rate  will  the  local  officials  be  able  to  make  any  large  in- 
crease in  the  local  rate  and  obtain  without  protest  revenues 
for  wasteful  purposes.  There  is  no  indication  that  local  offi- 
cials attempted  to  take  advantage  of  the  slight  reduction  in 
rate  occasioned  by  the  removal  of  the  state  tax.  Consider- 
ing county  taxes  alone  they  rose  nineteen  per  cent  in  the 
two  years,  1880  to  1882,  before  the  change,  four  per  cent 
between  1882  and  1884,  when  the  change  was  made,  and 
sixteen  per  cent  afterward,  between  1884  and  I886.1  This 
shows  no  undue  increase. 

As  for  equitableness  New  Jersey  suffers  like  every  other 
state  employing  the  general  property  tax,  whether  for  local 
or  for  state  purposes,  from  unequal  assessments.  The  valu- 
ation of  public  utilities,  except  railroads,  for  the  general 
property  tax  is  left  to  the  local  assessors.  More  than  this, 
the  pay  of  assessors  is  not  sufficient  to  attract  competent 
men;  there  are  few  uniform  rules  to  guide  them  in  their 
work;  and  local  election  or  appointment  subjects  them  to 
local  pressure.2  Further  there  is  little  attempt  to  classify 
personalty.  It  is  all  taxed  under  the  general  property  tax. 
The  inevitable  consequences  are  undervaluation  of  public 
utilities  through  lack  of  proper  information ;  undervaluation 
or  total  evasion  of  personalty,  particularly  intangibles,  for 
the  same  and  other  causes;  and  undervaluation  of  manu- 
factures through  fear  of  competition  from  neighboring 
states.  This  means  the  relative  overburdening  of  real  es- 
tate, particularly  that  of  private  individuals.  But  real  estate 
is  not  only  overburdened ;  it  is  unequally  overburdened.  As- 
sessed values  within  a  single  county  in  some  cases  vary  from 
forty  to  eighty  per  cent  of  true  value,  and  there  are  equal 
variations  between  different  classes  of  property  and  even  be- 

1  Computed  from  data  in  Reports  of  the  Comptroller,  1880-1886. 

2  Cf.  discussion  in  Mathews,  op.  cit.,  pp.  727-737. 


98      SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [392 

tween  separate  properties  of  the  same  class  within  each  dis- 
trict.1 Yet  assessed  values,  though  far  from  equal,  compare 
very  favorably  with  assessed  values  in  other  states.  Accord- 
ing to  the  census  estimate  for  1913  the  ratk>  of  assessed 
to  true  value  of  real  estate  was  fifty-four  per  cent,2  but  it 
is  believed  by  state  officials  and  others  acquainted  with 
conditions  in  New  Jersey  that  this  ratio  is  seventy  per  cent 
or  higher.3  To  what  extent  this  is  due  to  efficient  admin- 
istration, and  to  what  extent  separation  is  responsible,  can 
not  be  determined,  but  separation,  by  doing  away  with  one 
of  the  motives  for  undervaluation  is  perhaps  a  contribut- 
ing cause. 

Only  to  a  limited  extent  does  separation  remove  the  causes 
of  inequalities  or  the  inequalities  themselves,  as  far  as  the 
general  property  tax  is  concerned,  but  through  the  use  of 
special  taxes,  which  separation  requires,  certain  classes  of 
property  are  much  more  effectively  reached  and  the  burden 
on  unclassified  property  subject  to  the  general  property  tax 
is  lightened.  Further  classification  for  local  purposes,  per- 
haps with  certain  exemptions,  and  more  efficient  and  more 
centralized  administration,  will  go  far  toward  equalizing 
local  taxes. 

New  Jersey  has  already  attempted  some  centralization  of 
administration.  By  acts  of  1846,  1873  and  1883  county  offi- 
cials were  granted  powers  of  equalization  within  their  coun- 
ties, but  with  little  effect.  To  cite  one  example,  Hudson 
County,  after  having  benefited  for  nearly  twenty  years  from 
the  services  of  a  county  board  of  equalization  showed  as- 
sessments in  1890  ranging  from  thirty-three  to  eighty 
per  cent  of  true  value.4  In  1906  all  existing  county 

1  Report  of  Commission  to  Investigate  Tax  Assessment  in  .  .  .  New 
Jersey,  1912,  p.  16  et  seq. 

*  Wealth,  Debt  and  Taxation,  vol.  i,  p.  16. 

3  This  is  the  view  of  Mr.  A.  C.  Pleydell  of  the  New  York  Tax  Reform 
Association.  4  Mathews,  op.  cit.,  p.  729  et  seq. 


393]          PARTIAL  SEPARATION  IN  NEW  JERSEY  99 

TABLE  V * 

GROWTH  OF  ASSESSED  VALUES 
Date  Taxable  Values  Percentage  Increase 

1895 $786,998,100 

1900 891,237,300  13 

1905 1,153,683,000  29 

1910 2,045,898,200  78 

boards  of  equalization  were  abolished,  and  new  boards, 
appointed  by  and  responsible  to  the  governor,  were 
created,  with  the  result  that  assessed  values  rose  enorm- 
ously. Equalization  was  not  made  a  state  matter  until 
1891,  when,  following  the  recommendations  of  a  special 
commission  of  1890,  a  state  board  of  taxation  was 
created.  This  board  was  not  very  effective  at  first, 
since  it  was  given  no  power  of  raising  valuations,  but 
this  was  remedied  in  1894  and  the  board  was  granted  really 
more  powers  than  it  had  the  time  to  use.2  It  was  superseded 
by  a  state  board  of  equalization  in  1906  with  more  members 
and  larger  powers,  including  that  of  removing  local  asses- 
sors guilty  of  wilful  negligence.  The  board  has  not  in 
practice  been  able  to  enforce  this  last  power,  since  "  wilful 
negligence  "  is  difficult  to  prove.5  It  has,  however,  larger 
powers  than  are  generally  granted  to  central  boards,  and  is 
using  them  very  effectively.4  This  shows  that  centraliza- 
tion, which  is  generally  conceded  to  be  highly  desirable,  is 
entirely  compatible  with  separation,  and  has  not,  in  this 
case  at  least,  been  discouraged  by  lack  of  immediate  state 
interest.  The  state  school  tax,  since  nine-tenths  of  it  is 
apportioned  to  the  counties  on  the  basis  of  what  the  counties 
have  contributed,  and  only  one-tenth  on  the  basis  of  children 

Compiled  from  Reports  of  the  New  Jersey  State  Board  of  Equali- 
zation, 1890-1910. 

2  Mathews,  op.  cit.,  p.  733-  3  Ibid.,  p.  735. 

*  Since  merging  with  the  state  board  of  assessors,  1915,  this  board 
is  known  as  the  state  board  of  taxes  and  assessment. 


I0o   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [394 

of  school  age,  can  hardly  be  held  responsible  for  the  state's 
efforts  to  centralize  and  equalize  local  systems.  There  are 
still  gross  inequalities.  Neither  separation  nor  centraliza- 
tion has  as  yet  completely  eliminated  these ;  but  centralization 
has  done  away  with  a  great  many  of  them,  and  doubtless  will 
abolish  many  more,  though  probably  some  will  remain  as 
long  as  the  localities  retain  a  system  which  has  the  general 
property  tax  for  its  central  tax. 

The  local  districts  have  had  no  difficulty  in  obtaining  suf- 
ficient revenues,  for  very  little  property  has  been  removed 
from  local  taxation.  Only  the  "  main  stem,"  tangible  per- 
sonalty and  franchise  of  railroads  and  canal  companies,  and 
the  franchise  of  certain  other  corporations  are  reserved 
exclusively  for  state  taxation,  and  a  large  share  of  the  rev- 
enues from  these  are  returned  to  the  localities  for  the  sup- 
port of  schools.  In  consequence  the  local  divisions  do  not 
suffer. 

The  state  system  seems  to  be  equally  satisfactory.  There 
is  no  complaint  of  extravagance.  Expenditures  are  much 
the  same  as  in  similar  states.  Per  capita  governmental  cost 
payments  in  1913  amounted  to  $2.58  in  New  Jersey  as  com- 
pared with  $2.55  for  the  Middle  Atlantic  States,  and  $2.30 
for  all.1  The  corporations  are  not  heavily  taxed,  and  the 
debt  is  very  small,  and  is  exceeded  each  year  by  the  cash 
balance.  The  taxation  of  corporations  is  based  on  the  as- 
sumption that  there  is  a  value  over  and  above  the  value  of 
the  tangible  property,  which  is  not  reached  under  the  gen- 
eral property  tax.  To  reach  this  franchise  various  forms 
of  taxation  have  been  introduced ;  but  whether  the  tax  takes 
the  form  of  a  gross  earnings,  gross  premiums,  or  capital 
stock  tax  it  can  in  no  case,  except  where  net  earnings  are 
less  than  twenty  per  cent  of  gross,  and  the  rate  of  the  tax  is 
five  per  cent,  exceed  1.2  mills  on  total  valuation  of  the  cor- 

1  Wealth,  Debt  and  Taxation,  1913,  vol.  ii,  p.  40. 


395]          PARTIAL  SEPARATION  IN  NEW  JERSEY  IOi 

poration, — assuming  the  average  rate  of  return  on  capital 
to  be  six  per  cent.  This  would  not  be  a  serious  additional 
burden  even  were  the  corporations  taxed  locally  to  their  full 
value;  and  in  consideration  of  the  fact  that  the  localities 
do  not  tax  the  full  value  of  tangible  property  it  is  safe  to  say 
that  the  corporations  as  compared  with  real  estate,  are  un- 
dertaxed  rather  than  overtaxed.  All  railroad  and  canal 
property  which  is  not  locally  taxed  is  taxed  by  the  state  at 
the  same  rate  as  property  taxed  locally,  and  consequently 
pays  somewhat  more  than  other  corporations,  and  probably 
somewhat  more  than  property  in  general,  since  the  property 
assessed  by  the  state  is  presumably  assessed  nearer  true  value. 
There  is  little  equality  between  the  different  classs  of  cor- 
porations. Mining  and  manufacturing  companies  are 
exempt  from  state  taxation,  and  of  those  corporations  sub- 
ject to  the  capital  stock  franchise  tax  the  larger  ones  pay 
less  owing  to  the  regressive  rate.  Insurance  companies  pay- 
ing on  gross  premiums  pay  at  varying  rates.  Street  railways 
pay  five  per  cent  on  gross  earnings  to  the  local  tax  districts, 
and  other  public  utilities,  except  railroads,  two  per  cent. 

Centralization  of  administration  has  been  adequately  con- 
sidered under  the  local  system.1  It  need  only  be  added  that 
the  state  board  of  equalization  and  state  board  of  assessors 
were  merged  in  1915  in  order  to  secure  further  equality,  as 
well  as  efficiency  and  economy.  This  and  other  minor 
changes  mark  a  growing  centralization  of  administration. 

The  revenues  of  the  state  have  proved  ample,  contrary 
to  the  experience  of  most  states  that  have  attempted  separa- 
tion. This  is  due  to  the  fact  that  New  Jersey  is  the  home  of 
much  of  the  wealth  employed  in  New  York ;  for  a  large  num- 
ber of  corporations  which  operate  for  the  most  part  in  New 
York  have  obtained  their  charters  in  New  Jersey.  Twenty- 
five  per  cent  of  all  state  receipts  and  seventy-nine  per  cent 

1  Supra,  p.  98  et  seq. 


I02   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [396 

of  the  revenues  of  the  state  fund  were  derived  from  cor- 
porations in  191 3-1  The  result  has  been  that  the  state  has 
for  more  than  thirty  years  enjoyed  a  surplus.  But  a  sur- 
plus of  any  size  has  generally  been  found  to  encourage  un- 
necessary expenditures.  The  state  has  no  tax  which  it  can 
adjust  to  needs.  The  railroad  tax  has,  since  1906,  been 
made  equal  to  the  average  rate  on  other  property  locally 
taxed,  but  the  state  has  returned  all  above  the  one-half  per 
cent  previously  obtained,  to  the  localities  for  schools.  But 
even  were  the  state  to  keep  the  tax  there  would  be  no  neces- 
sary relation  between  the  changes  in  local  needs  and  the 
changes  in  state  needs.  All  other  taxes  are  at  fixed  rates. 
The  state  has,  through  subventions,  turned  over  a  large 
amount  of  its  revenues  to  the  localities,  giving  them,  since 
1897,  in  addition  to  the  proceeds  of  the  school  tax,  the  entire 
yield  from  certain  railroad  property,  and,  since  1906,  part  of 
the  yield  from  all  railroad  property.  Even  so  a  cash  sur- 
plus has  accumulated  and  there  has  been  no  debt,  as  in 
Pennsylvania,  to  absorb  it.  The  surplus  of  the  sinking  fund 
exceeded  the  debt  from  1898  until  1902.  The  sinking  fund 
was  abolished  in  this  year,  but  the  small  debt  which  still  con- 
tinued has  been  more  than  covered  by  the  cash  and  securi- 
ties 2  of  the  state. 

The  state  apparently  has  not  suffered  from  this  surplus. 
In  1 88 1,  three  years  before  the  passage  of  the  important  cor- 
poration tax  laws,  revenues  were  found  sufficient  to  omit  the 
state  tax — but  only  for  one  year.  Increasing  appropriations 
of  the  legislature  made  it  necessary  to  return  to  it  the 
next  year,  and  after  its  omission  in  1883,  even  with 
the  new  corporation  taxes,  the  comptroller  complained 
of  the  extravagant  appropriations  of  the  legislature  and 

1  Report  of  the  Treasurer,  1913. 

*  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  pp.  166-167. 


397]          PARTIAL  SEPARATION  IN  NEW  JERSEY 

insufficiency  of  revenues,  and  it  was  found  necessary 
for  some  years  to  borrow  to  meet  current  expenditure. 
The  growth  of  the  new  sources,  however,  soon  made 
revenues  ample.  The  floating  debt  was  cancelled  in  1891 
and  a  considerable  surplus  was  realized  each  year  there- 
after.1 Rising  expenditure,  principally  for  new  build- 
ings, led  the  comptroller  to  give  warning,  in  1896,  that 
if  such  expenditure  continued  it  would  be  necessary  to 
levy  a  state  tax  again.  But  retrenchment  followed,  and 
in  1898  the  comptroller  declared  the  financial  condition 
of  New  Jersey  to  be  more  satisfactory  than  that  of  any  other 
state.2  The  surplus  continued  to  rise  until  1903,  when  in- 
creasing appropriations  for  new  buildings,  for  increased  ex- 
penses of  institutions,  and  to  counties  for  schools  again  re- 
duced it,  and  in  1907  the  comptroller  once  more  was  forced 
to  remind  the  legislature  that  such  appropriations  would 
necessitate  a  state  tax.3  Again  appropriations  were  reduced 
and  the  surplus  rose  in  response.  There  is  no  indication  in 
this  of  any  gross  extravagance  or  misuse  of  funds,  although 
it  may  be  that  there  was  no  great  demand  for  many  of  the 
public  buildings  erected.  The  custom  of  increasing  appro- 
priations to  counties  for  schools  has  done  much  to  reduce 
the  surplus.  But  the  action  of  the  legislature  suggests 
throughout  an  effort  to  accommodate  expenditures  to  reve- 
nues. It  can  hardly  be  hoped  to  secure  even  a  crude  adjust- 
ment of  revenues  to  expenditures  without  an  elastic  tax. 
To  adjust  expenditures  to  revenues  is  likely  to  lead  to  ex- 
travagance in  case  the  revenues  are  large,  or  to  failure  to 
make  needed  expenditures  in  case  revenues  are  small,  al- 
though it  is  conceivable  that  a  state  might  spend  a  growing 
income  to  good  advantage.  If,  on  the  other  hand,  no  ad- 
justment is  made,  a  deficit  or  a  surplus  is  inevitable. 

1  Report  of  the  Comptroller,  1891. 

2  Ibid.,  1898,  p.  7.  *Ibid.,  1907,  p.  2. 


CHAPTER  VII 

PARTIAL  SEPARATION  IN  VERMONT 
I.  HISTORY  OF  TAXATION  IN  VERMONT 

VERMONT,  in  common  with  the  other  New  England 
states,  employed  the  general  property  tax  as  the  principal 
state  tax  for  nearly  a  century.  This  source  of  revenue 
began  to  decline  in  importance  after  the  Civil  War,  but  was 
not  given  up  entirely  for  state  use  until  1902.  It  is  still 
employed  by  the  state  for  school  and  highway  purposes, 
but  the  yield  is  returned  to  the  local  districts  —  although  not 
in  proportion  to  assessed  value.  As  in  other  states  where 
the  general  property  tax  has  been  abolished  for  state  pur- 
poses the  state  reserves  the  right  to  levy  a  direct  tax  at  any 
time,  and  such  a  tax  was  actually  levied  in  1914,  and  again 
in  1916. 

TABLE  VI 
GENERAL  PROPERTY  TAX  IN  VERMONT,  1870-1916  1 

r.*,  ™i  !>*•***<•*<,         Percentage  of  Revenues 
Year          General  Revenue          General  Prop*  ty  from  Property 


1870  ........  ^562,621  $Si$,4*°  91 

1880  ........  477,688  384,734  81 

1890  ........  692,257  353,412  51* 

1900  ........  938,490  346,8n  37* 

1910  ........  1,230,644  ...... 

1914  ........     2,114,567  241,225  n* 

1916  ........     2,953,704  ...... 

*  This  tax  was  levied  only  every  other  year  after  1884.     Consequently  it  did 
not  play  such  an  important  role  as  these  percentages  indicate. 

1  Compiled  from  Reports  of  the  Auditor  of  Accounts  of  Vermont 
for  these  dates. 

104  [398 


399]  PARTIAL  SEPARATION  IN  VERMONT 

Early  general  property  taxes  were  levied  on  a  grand  list, 
which  was  at  first  made  up  of  different  classes  of  property 
listed  at  various  percentages  of  actual  value  according  to 
kind  and  value.1  Unimproved  land  and  some  buildings 
were  exempt.2  In  1841  these  classes  and  exemptions  were 
abolished  and  all  property  was  placed  on  the  grand  list  at 
one  per  cent  of  its  estimated  true  value.  Thus  the  general 
property  tax  was  made  an  equal  tax  on  all  classes  of  prop- 
erty.3 No  other  important  changes  were  made  in  the  tax 
although  its  administration  was  the  cause  of  considerable 
legislation.  Immediately  following  the  law  of  1819,  which 
first  put  the  assessment  of  real  estate  on  the  basis  of  actual 
value,  inequalities  led  to  the  establishment  of  both  county 
and  state  boards  of  equalization.4  This  was  followed  by  a 
number  of  acts  aiming  to  reach  personalty  more  success- 
fully and  to  equalize  the  assessment  of  real  estate,  but  the 
tax  was  not  sufficiently  burdensome  to  cause  serious  com- 
plaint until  after  the  Civil  War,  for  Vermont  never  became 
involved  in  the  policy  of  state  aid  to'  railroads  and  canals 
which  brought  many  of  her  neighbors  into<  such  serious 
financial  straits.  Beginning  about  1870,  however,  increas- 
ing complaints  aroused  investigation  and  reform.5  Low 
and  unequal  rates  of  assessment  were  found;  personalty 
was  rapidly  disappearing  from  the  lists,  and  what  remained 
was  assessed  at  even  lower  and  more  varied  rates  than  real 
estate.  The  state  and  county  boards  of  equalization,  while 
preventing  some  of  the  more  glaring  inequalities,  were  un- 

1  Carriages,  for  instance,  were  listed  at  12  per  cent,  cash  at  6  per  cent 
and  dwelling  houses  valued  at  less  than  $1,000  at  2  per  cent,  those  over 
that  being  3  per  cent.  (F.  A.  Wood,  "  Finances  of  Vermont,"  Columbia 
University  Studies  in  History,  Economics  and  Public  Law,  1912,  vol. 
Hi,  no.  3,  P-  32.) 

*Ibid.,  p.  30.  *Ibid.,  p.  38. 

'Ibid.,  p.  34.  ~°Ibid.,  p.  101  et  seq. 


I06   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [400 

able,  and  in  some  cases  unwilling,  to  accomplish  any  real 
equality.1  To  remedy  matters,  listers  were  invested  with 
greater  powers,  and  penalties  for  failure  to  enforce  the  law 
were  made  more  severe;  but  the  growth  of  corporation 
taxes,  and  the  consequent  decrease  in  the  state  tax  on  gen- 
eral property,  relieved  the  situation  before  any  important 
steps  had  been  taken  to  secure  greater  equality.  In  1882 
state  equalization  was  given  up  entirely.2 

The  appearance  of  special  taxes  not  levied  on  the  grand 
list 3  began  with  bank  taxation  in  1818.  The  tax  was  de- 
termined for  each  bank  as  incorporated,  and  was  generally 
on  profits,  although  in  some  instances  it  was  placed  on 
capital  value.4  These  taxes  did  not  take  the  place  of  the  tax 
on  shareholders  and  soon  disappeared.  After  1854  the  tax 
on  shares  of  non-residents  only  was  paid  by  the  banks  to 
the  state.5  This  was  distributed  among  the  counties. 

Similar  taxes  were  applied  to  the  profits  of  domestic  fire- 
insurance  companies  in  1829.  Foreign  fire-insurance  com- 
panies had,  since  1825,  been  taxed  on  gross  premiums  col- 
lected within  the  state.  Various  acts  followed,  including, 
in  1854,  a  retaliatory  law.6  These  were  the  only  efforts 
made  to  reach  corporations  before  1878.  Most  of  the  laws 
were  soon  abandoned  and  apparently  none  of  them  ever 
were  seriously  enforced  or  were  productive  of  much 
revenue. 

In  1878  banks  were  again  chosen  for  special  taxation. 
This  time  savings  banks  were  taxed  on  deposits  and  accu- 

1Wood,  op.  cit.,  p.  101.  *Ibid.,  p.  103. 

3  Poll  taxes  have  always  been  an  appreciable  source  of  revenue,  and 
income  taxes  were  levied  until  1850, — but  these  were  levied  on  valuations 
placed  on  the  grand  list  with  property. 

4 The  rates  on  profits  varied  from  6  to  12  per  cent;  those  on  capital 
value  from  one-third  to  one-half  of  one  per  cent. 

5  Wood,  op.  cit.,  p.  45  et  seq.  *Ibid.,  p.  47. 


4oi ]  PARTIAL  SEPARATION  IN  VERMONT 

mulations.  This  tax,  except  that  part  of  it  levied  on  de- 
posits owned  by  non-residents,  was  returned  to  the  towns. 
It  was  revised  in  1882,  being  made  a  strictly  state  tax,  and 
applying  only  to  deposits  under  $1,500.  Deposits  in  excess 
of  this  amount  were  taxed  by  the  towns  to  the  individual 
owners.  Trust  companies  were  taxed  in  the  same  manner.1 
These  taxes  did  not  take  the  place  O'f  local  taxes  on  shares. 
Various  changes  in  rates  and  exemptions  followed.  At 
present  both  savings  banks  and  trust  companies  are  taxed 
seven- tenths  of  one  per  cent  on  all  deposits  regardless  o>f 
size  and  without  deductions  for  real  estate.  Such  deposits 
are  exempt  from  local  taxation.  National  banks  have  been 
taxed  in  the  same  manner  since  1906  on  all  deposits  bear- 
ing over  two  per  cent  interest.  The  tax  is  optional,  the  bank 
being  privileged  to  leave  such  deposits  under  the  general 
property  tax.2 

The  year  1882  marked  the  real  beginning  of  the  present 
system  of  corporation  taxation.  Insurance  companies,  do- 
mestic and  foreign,  \vere,  beginning  in  this  year,  taxed  two 
per  cent  on  premiums  and  assessments  received  within  the 
state,  with  a  retaliatory  measure  added  in  1888.  Domestic 
life-insurance  companies  were  in  addition  taxed  one-half  of 
one  per  cent  on  surplus  over  four  per  cent  of  policies  less  the 
value  of  real  estate.  This  tax  was  raised  to  one  per  cent 
in  1890,  and  in  1908  was  applied  also  to  domestic  fire,  acci- 
dent and  fidelity  companies.3 

Railroads  were  taxed  on  gross  earnings  under  the  law  of 
i882.4  Though  subject  to  certain  specific  provisions  pre- 
vious to  this  time,  they  had  remained  under  the  general 
property  tax.  In  1890,  following  a  decision  of  the  Ver- 
mont supreme  court  declaring  this  provision  of  the  law 

1  Wood,  op.  cit.,  p.  81  et  seq.  2Ibid.,  p.  84. 

*Ibid.,  pp.  85-86.  4  Ibid.,  p.  86  et  seq. 


I0g   SEPARATION  OF  STATE  AND 'LOCAL  REVENUES    [402 

unconstitutional,  a  tax  of  seven-tenths  of  one  per  cent  on 
valuation  was  imposed  instead,  with  an  optional  tax  on 
gross  earnings  of  2.5  per  cent.  The  latter  was  generally 
chosen.  These  rates  were  raised  in  1904,  1906  and  1908, 
as  the  result  of  a  report  in  1900  which  showed  real  estate 
to  be  paying  four  times  what  railroad  property  was  paying.1 
At  present  railroads  pay  a  tax  on  valuation  at  the  rate  of 
1.25  per  cent.  The  optional  gross  receipts  tax  was  repealed 
in  1912. 2 

Express,  telegraph,  telephone,  steamboat,  car  and  trans- 
portation companies  were  also  brought  under  the  gross 
earnings  tax  of  i882.3  All  of  these  companies,  except  ex- 
press and  telegraph  companies,  which  had  been  taxed  on 
gross  earnings  since  1880,  had  been  under  the  general  prop- 
erty tax  up  to  this  time.  In  1890  the  tax  on  steamboat,  car 
and  transportation  companies  was  changed  to  one  on  val- 
uation, with  an  optional  tax  on  gross  earnings.  The  rates 
of  these  taxes  are  at  present  one  per  cent  on  valuation  and 
2.5  per  cent  on  gross  earnings.  Express  companies  re- 
mained under  the  gross  earnings  tax  until  1906,  when  a 
flat  rate  of  $8  per  mile  of  road  over  which  their  business 
was  carried  on  was  substituted.  This  was  later  raised  to 
$20,  and  in  1915  reduced  to  $16.  Telegraph  companies 
remained  under  the  gross  earnings  tax  until  the  law  was 
contested  in  1892.  Then,  to  obviate  difficulties,  the  legisla- 
ture made  the  tax  one  of  sixty  cents  per  mile  of  one-line  wire 
and  forty  cents  for  each  additional  mile  of  wire,  with  the 
alternative  of  a  three  per  cent  tax  on  gross  earnings  received 
within  the  state.  This  remains  today.  No  change  in  tele- 

1  Double  Taxation  in  Vermont.    Report . . .  t o  the  Legislature  of  1900, 
p.  38. 

2  Report  of  the  Commissioner  of  Taxes,  1914,  p.  4  et  seq. 

3  Wood,  op.  cit.,  p.  92. 


403]  PARTIAL  SEPARATION  IN  VERMONT 

phone  company  taxation  was  made  until  1902,  when  the 
gross  earnings  tax  was  replaced  by  one  on  transmitters  and 
miles  of  wire.  In  1904  the  alternative  of  a  gross  earnings 
tax  was  offered.1  Both  of  these  taxes  were  abolished  in 
1914  and  a  tax  of  1.25  per  cent  on  actual  value  was  im- 
posed.2 The  gross  earnings  tax  on  sleeping-car  companies 
was  replaced  in  1904  by  one  of  seven-tenths  of  one  per  cent 
on  valuation,  and  parlor  and  dining  car  companies  were  in- 
cluded. 

Thus  at  present  express  companies  pay  a  flat  rate;  rail- 
road, telephone,  sleeping  car  and  dining  and  parlor  car  com- 
panies pay  on  valuation,  and  other  transportation  companies, 
including  telegraph  companies,  have  as  an  alternative,  which 
is  generally  taken  advantage  of,  a  gross  earnings  tax. 

Insurance  companies  are  taxed  on  gross  premiums,  and 
bank  and  trust  companies  on  deposits,  with  the  alternative 
of  the  general  property  tax.  No  attempt  has  been  made  to 
reach  the  other  classes  of  corporations  except  under  the 
general  property  tax,  and  manufacturing  and  mining  com- 
panies may  be  specifically  exempted  from  that  tax  for  a 
period  of  ten  years. 

Graduated  incorporation  taxes  have  been  levied  since 
1898,  and  annual  license  taxes  on  all  corporations,  domestic 
and  foreign,  of  from  $10  to  $50  have  also  been  levied  since 


The  preponderance  of  the  agricultural  element  in  the 
legislature  where  the  corporations  are  not  adequately  rep- 
resented accounts  for  the  popularity  of  corporation  taxes. 
The  state  derives  by  far  the  larger  part  of  its  revenues 
from  these  sources.  The  only  other  important  revenues 

1  Wood,  op.  cit.,  p.  95. 

*  Report  of  tJie  Commissioner  of  Taxes,  1914,  p.  19  et  seq. 

*  Wood,  op.  cit.,  p.  96. 


IIO   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [404 

are  from  licenses  and  a  five  per  cent  collateral  inheritance 
tax,  introduced  in  1896. 

TABLE  VII1 
SOURCES  OF  STATE  REVENUE,  EXCLUSIVE  OF  LOANS,  VERMONT,  1916 

Source  Amount  Per  cent  of  Total 

Total ^2,953,704  100 

Corporation 1,582,077  53.5 

General  Property 316,104  10.7 

Inheritance 101,593  3.5 

Miscellaneous 953»93o  32.3 

REVENUES  FROM  CORPORATION  TAXES,  1916 

Total $1,582,077  100 

Banks  and  Trust  Companies 755»7^2  47.8 

Railroads 549»38o  34.8 

Express,  Telegraph  and  Transportation .          26,054  1.6 

Telephone 44>356  2.8 

Insurance 174,661  n.o 

Annual  License  Tax 3ro84  2.0 

Annual  Charter  Tax 280  o.o* 

*  Less  than  one-tenth  of  one  per  cent. 

The  grand  list  tax,  which  has  always  been  of  the  nature 
of  a  general  property  tax,  and  since  1841  has  been  dis- 
tinctly such  a  tax,  is  the  backbone  of  the  local  fiscal  system. 
It  supplied  71  per  cent  of  revenues  in  I9I4-2  Licenses,  re- 
ceipts from  public  lands,  and  subventions,  however,  have 
been  at  various  periods  of  considerable  importance.  Subven- 
tions consist  principally  of  the  proceeds  of  educational  and 
highway  funds  and  of  the  state  school  and  highway  taxes, 
and  are  devoted  to  these  specific  purposes.  The  school 
tax  of  five  mills  (now  eight  mills)  was  first  levied  in  1890 
and  the  highway  tax  of  five  mills  in  i892.3  They  are  appor- 
tioned in  part  according  to  the  number  of  schools  and  miles 

1  Compiled  from  the  Report  of  the  Commissioner  of  Taxes  and  Report 
of  the  Treasurer,  1916. 

2  Computed  from  data  in  Report  of  the  Treasurer,  1914. 

3  Wood,  op.  cit.,  p.  115  et  seq. 


405  ]  PARTIAL  SEPARATION  IN  VERMONT  1 1  x 

of  road,  in  part  according  to  local  expenditures  for  these 
purposes,  thus  obtaining  a  redistribution  which  favors  the 
rural  districts  at  the  expense  of  the  urban  districts.  These 
taxes  are  the  result  of  Vermont's  system  of  representation 
in  the  state  legislature  which  gives  the  rural  districts  a 
disproportionate  share  of  seats  in  the  legislature,  but  if 
official  reports  may  be  trusted  they  are  highly  satisfactory. 

2.    EFFECTS    OF    SEPARATION 

Separation  has  arisen  in  Vermont  largely  as  a  result  of 
the  peculiar  system  of  representation  just  referred  to.  The 
agricultural  interests  have  been  eager  to  shift  the  burden 
of  taxation  as  far  as  possible  to  the  corporations,  and  they 
have  been  in  a  position  to  do  so.  The  amount  of  corporate 
wealth  in  the  state  is  not  large,  but  the  corporations  have 
borne  the  weight  of  the  state  expenditures  without  serious 
inconvenience. 

Separation,  owing  to  the  levy  of  the  school  and  highway 
taxes,  has  never  been  complete.  These  taxes  are  levied  in 
proportion  to  assessed  value,  but,  unlike  New  Jersey,  are 
distributed  entirely  according  to  other  standards,  and  con- 
sequently leave  the  same  incentive  for  the  localities  to  under- 
assess  property  as  exists  under  a  tax  for  state  purposes. 
Nevertheless,  most  of  the  effects  of  separation  have  been 
realized,  for  the  tax  is  small,  and  in  any  case  the  removal  of 
the  state  tax  seems  to  have  little  effect  on  local  assessments. 
Further,  the  tax  is  for  purposes  which  are — or  have  been 
until  recently  —  ordinarily  considered  local.  Revenue  for 
strictly  state  purposes  is  entirely  separate  and,  to  the  extent 
that  corporation  taxes  are  depended  on,  separation  of  source 
is  complete,  since  the  property  of  these  corporations  is  re- 
served exclusively  for  state  taxation.  What  is  generally 
held  to  be  the  chief  gain  of  separation — the  removal  of  the 
state  general  property  tax — has  been  realized;  and  likewise 
the  chief  defect — inelasticity  of  revenues. 


II2    SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [406 

There  is  no  suggestion  that  separation  has  encouraged 
extravagance  on  the  part  of  the  localities.  As  already  ex- 
plained, such  extravagance,  if  it  occurred,  would  be  only 
an  immediate  and  temporary  result.  The  declining  need  of 
revenues  resulting  from  the  relief  from  war  expenditures/ 
and  the  rapidly  rising  value  of  taxable  property  during  the 
period  of  growing  separation,  and  the  rising  expenditure — 
due  to  increased  governmental  activities  in  the  later  period 
of  achieved  separation — are  not  peculiar  to  Vermont.  Sim- 
ilar changes  are  reflected  in  the  tax  rates  of  other  states. 
The  sharp  decline  in  the  rate  on  general  property  from  1880 
to  1902  is  due  only  in  part  to  the  reduction  of  the  state  tax, 
since  this  tax  never  rose  above  fifty  cents  in  the  decade  pre- 
ceding 1880,  and  still  averaged  nearly  ten  cents  annually 
(though  levied  only  once  in  two  years)  in  the  twenty  years 
following.  Whether  or  not  local  officials  took  advantage 
of  the  decline  in  rate  cannot  be  determined  from  the  tax 
rates.  There  appears  to  be  no  specific  complaint  of  ex- 
travagance. 

The  rate  of  assessed  to  actual  value  of  real  estate  in  1912 
was  seventy  per  cent  according  to  federal  census  estimates. 
This  is  comparatively  high,  being  exceeded  by  only  nine 
states.  There  is  little  complaint  of  inequalities.  That  in- 
equalities exist,  here,  as  elsewhere,  has  been  noted.2  The 
usual  complaints  of  undervaluation  of  real  estate  and  total 
evasion  of  personalty  are  made ;  the  usual  causes — incompe- 
tence or  dishonesty  of  assessors  and  the  difficulties  of  reach- 
ing intangibles  under  the  most  favorable  circumstances — are 
assigned;  and  the  usual  remedies — centralization  of  admin- 
istration and  low  rate  taxes  on  intangibles — are  suggested. 
Yet  inequalities  are  not  as  serious  as  in  many  states.  An 

1  Cf.  Wood,  op.  cit.,  p.  79  et  seq. 

2  See  Commissioner  of  Taxes,  Special  Report  Relating  to  Taxation, 
1902,  pp.  46-47;  Report  of  Commission  on  Taxation,  Vermont,  1908,  p.  20. 


407] 


PARTIAL  SEPARATION  IN  VERMONT 


investigation  made  in  1900  revealed  the  fact  that  the  lowest 
rate  of  appraisal  in  towns  was  66.7  per  cent  and  that  the 
average  rate  of  assessment  in  counties  was  from  78  to  96 
per  cent.1  Some  slight  changes  have  been  made,  but  if  the 
average  rate  of  assessment  of  real  estate  was  70  per  cent 
in  1912,  as  compared  with  71.7  per  cent  in  1900  (as  given  in 
the  federal  census),2  apparently  neither  separation  nor  im- 
proved administration  has  proved  effective.  The  real  griev- 
ance of  the  bearer  of  the  general  property  tax  is,  however, 
the  large  number  and  the  inequalities  of  the  exemptions. 
Personal  property  exempted  on  account  of  deductions  for 
indebtedness  alone  amounted,  in  1902,  to  65  per  cent  of  all 
personalty  listed;  in  1910  it  was  equal  to  72  per  cent.3  No 
provision  was  made  for  deduction  for  debts  on  real  estate, 
but  recently  (1915),  to<  avoid  double  taxation,  mortgages 
have  been  exempted.4  Attempts  to  abolish  many  exemp- 
tions and  secure  a  low-rate  tax  on  intangibles  have  been 
unsuccessful.  Exemptions  are  not,  perhaps,  as  serious  a 
matter  as  they  are  usually  asserted  to  be,  since  the  property 
exempted  is  in  large  part  the  property  o>f  corporations  taxed 
by  the  state,  and  intangibles,  which  usually  escape  anyhow 
under  the  general  property  tax;  but  the  tax  rate  of  $1.81 
(1912),  while  not  high,  measured  according  to  assessed  val- 
uation,5 is  high  when  the  rate  of  assessed  to  true  value  is 
considered.  It  means  a  rate  of  approximately  13  mills  (or 
more  since  real  estate  bears  a  much  larger  proportion  of  the 
tax  than  personalty)  on  actual  value.6  It  is  also  high  com- 

1  Report  on  Double  Taxation,  p.  35. 

2  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  16. 

3  Wood,  op.  cit.,  p.  107. 

4  Report  of  Commissioner  of  Taxes,  1916,  pp.  16-17. 

5  The  rate  on  assessed  valuation  was  exceeded  in  1912  by  thirty  states. 
Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  751. 

*C/.  Pennsylvania  with  a  rate  of  II  mills  (1912),  Michigan,  12  mills 
(1911),  Wisconsin,  13  mills  (1913),  and  New  York,  17  mills  (1914). 
These  states  are  all  industrially  far  in  advance  of  Vermont. 


II4  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [408 

pared  with  the  taxes  on  corporations.  Those  corporations 
subject  to  the  ad  valorem  taxes,  assuming  their  assessed  val- 
uations to  be  equal  to  real,  pay  from  seventy  cents  to  $1.25 
(cf.  real  estate  with  a  tax  rate  on  real  value  of  $1.27). 
Those  subject  to  gross  earnings  taxes  pay  less.  Thus  real 
estate,  except  that  classed  as  operative  property  of  corpora- 
tions, is  paying  more  than  other  property  in  the  state. 
Separation  has  not  resulted  in  a  light  burden  on  such  prop- 
erty, although  the  revenue  for  state  purposes  —  and  per 
capita  state  expenditures  are  relatively  high  in  Vermont — is 
derived  entirely  from  other  sources.  The  explanation  is  that 
Vermont,  like  California  and  Connecticut,  has  deprived  the 
localities  of  the  privilege  of  taxing  the  property  of  those 
corporations  which  are  taxed  by  the  state.  Also,  as  has 
been  mentioned  above,  there  are  a  large  number  of  exemp- 
tions, some  of  which  perhaps  are  not  justifiable.  This  has 
resulted  in  concentrating  the  burden  of  relatively  small 
taxes  1  on  a  small  amount  of  property.  On  the  one  hand, 
separation  has  removed  the  burden  of  the  state  tax  from 
general  property ;  on  the  other  it  has  narrowed  the  base  for 
the  local  tax.  To  measure  the  gain  or  loss  to  the  owner  of 
real  estate  is  practically  impossible;  but  while  the  gain  or 
loss  must  vary  from  district  to  district  and  from  property 
to  property,  it  is  almost  certain  that,  taking  the  state  as  a 
whole,  real  estate,  particularly  that  in  rural  districts,  where 
there  has  been  less  corporate  property  to  exempt,  is  paying 
less  than  it  would  pay  under  a  general  property  tax  for 
state  and  local  purposes.  Special  corporation  taxes  cen- 
trally administered,  even  when  low  and  permitting  many 
exemptions,  reach  corporations  far  more  effectively  than  the 
general  tax ;  and  the  more  corporate  property  pays  the  less 
is  borne  by  other  property. 

1  In  1913  only  three  states,  Alabama,  New  Mexico,  and  North  Carolina, 
collected  smaller  local  revenues  per  capita  than  Vermont.  (Estimated 
from  data  in  Wealth,  Debt  and  Taxation,  1913,  vol.  ii.) 


409] 


PARTIAL  SEPARATION  IN  VERMONT 


The  first  effect  on  the  administration  of  the  general  prop- 
erty tax  of  the  effort  to  separate  revenues  was  a  step  toward 
decentralization;  for  while  the  state  undertook  central  val- 
uation of  corporate  property  for  state  purposes,  it  gave  up 
(1882)  the  function  hitherto  exercised  of  equalizing  local 
assessments  —  the  assumption  being  that  the  removal  of  the 
state  tax  would  remove  the  causes  of  inequalities,  and  that 
the  greater  powers  and  penalties  given  the  listers  at  the 
same  time  would  be  sufficient  to  cope  with  the  situation. 
When  it  was  realized  that  greater  equality  had  not  been  ob- 
tained, agitation  for  state  control  again  arose.  An  inves- 
tigation made  in  1908  showed  the  existing  administrative 
provisions  to  be  both  inadequate  and  unenforced,  and  in 
consequence  the  commissioner  of  taxes  was  given  enlarged 
powers  in  1910  which  permit  him  to  instruct  local  listers 
and  require  them  to  make  any  returns  he  may  desire.1 
Effective  central  control  has  not  yet  been  attained,  but  the 
tendency  is  decidedly  in  that  direction.  Separation  does  not 
do  away  with  the  need  of  such  centralization,  nor  does  it 
prevent  it  —  although  in  the  case  of  Vermont  it  has  appar- 
ently retarded  it. 

Local  divisions  have  obtained  revenue  without  difficulty. 
The  withdrawal  of  corporate  property  from  local  taxation 
has  been  gradual  and  in  consequence  readjustment  has  not 
been  difficult.  Further,  the  control  of  the  distribution  of 
school  and  highway  taxes  by  the  state  has  relieved  the 
poorer  districts.  The  burden  on  realty  is  heavy  and  local 
expenditure  is  rising  rapidly  ;  but  the  localities  do  not  appear 
to  be  suffering  seriously  and  the  agitation  for  a  low-rate 
tax  on  intangibles  and  the  abolition  of  many  of  the  present 
exemptions  may  at  any  time  result  in  legislation  which  will 
relieve  real  estate. 

1  Wood,  op.  tit.,  p.  no. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [410 

The  reports  of  the  state  officials  are  singularly  non- 
committal as  to  the  working  of  the  present  system  and  the 
activities  of  the  state  legislaure,  offering  no  praise  and 
making  no  complaint.  The  financial  condition  of  the  state 
appears,  however,  to  be  very  good.  Receipts  are  generally 
slightly  in  excess  of  disbursements,  and  the  small  funded 
and  floating  debt  is  easily  covered  by  the  cash  and  securities 
of  the  state,  and  in  some  years  by  the  cash  balance  alone.1 
Expenditures  have  increased  steadily  and  rapidly  since  1880 
(increasing  four  fold  in  the  thirty  years  1880-1 9 io,2  and 
65  per  cent  in  the  three  years  19101913), 3  but  they  have 
readily  been  met.  The  general  property  tax  was  levied 
once  in  two  years  until  1902,  but  after  that  date  it  was 
found  unnecessary  until  1914,  when  a  tax  of  one  mill  was 
again  levied.  During  this  period  there  is  no  evidence  of 
extravagance.  The  rise  in  expenditure  is  due  to  the  in- 
creased activities  of  the  government,  such  as  have  been  un- 
dertaken in  recent  years  in  all  of  the  states — those  employ- 
ing the  general  property  tax  as  well  as  those  depending  on 
corporation  taxes.  Per  capita  state  expenditure  is  (1913) 
$6.54,4  which  is  higher  than  that  of  any  other  New  England 
state  except  Massachusetts.  This  can  be  accounted  for  by 
the  very  heavy  expenditure  incurred  for  education  and  the 
very  considerable  outlay  for  highways.  In  addition,  the 
state  support  of  charitable,  correctional  and  penal  institu- 
tions is  generous,  and  a  large  number  of  commissions  are 
maintained.  Such  expenditure  is  going  on  throughout  the 
country — and  if  in  Vermont  it  is  higher  than  in  most  states, 
at  least  there  has  been  no  complaint,  and  it  has  not  resulted 
in  a  heavy  burden  on  the  corporations,  which  are  paying 

1  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  pp.  208-209. 

2  Computed  from  data  in  Wood,  op.  cit.,  pp.  140-141. 

3  Computed  from  data  in  Treasurer's  Reports  for  these  years. 

4  Wealth,  Debt  and  Taxation,  1913,  vol.  ii,  p.  40. 


4i ij  PARTIAL  SEPARATION  IN  VERMONT  nj 

less  than  property  locally  taxed  and  no  more  than  corpora- 
tions in  most  of  the  states  where  they  are  subject  to  special 
taxes. 

As  for  the  equitableness  of  the  state  taxes,  the  central 
valuation  of  corporate  property  has  been  fairly  successful, 
so  that  inequalities  between  the  corporations  of  one  class  are 
small.  No  great  effort  has  been  made  to  obtain  equality  of 
the  burden  borne  by  different  classes  of  corporations — which 
is  of  less  importance.  Railroad  and  telephone  companies  pay 
$1.25  per  $100  valuation,  and  car  companies  and  banks  (on 
deposits)  pay  seventy  cents.  Insurance  companies  pay  from 
one  to  two  per  cent  on  premiums.  Telegraph  companies  pay 
three  per  cent  on  gross  earnings,  which  is  probably  less  than 
other  corporations  are  paying,  though  with  no  data  on  the 
ratio  of  gross  earnings  to  actual  value  no  exact  comparison 
can  be  made.  Manufacturing  and  mining  companies,  which 
are  taxed  under  the  general  property  tax  with  a  ten-year  ex- 
emption, probably  pay  least  of  all,  owing  to  ineffective  local 
assessments.  Those  corporations  paying  $1.25  on  valua- 
tion, while  paying  nominally  less  than  the  general  property 
tax  rate,  are,  if  assessed  at  true  value,  paying  nearly  as 
much  as  other  property — $1.25  as  compared  with  $1.27  on 
actual  value  in  19^2.  The  tendency  to  increase  the  rates  on 
corporations  leads  to  greater  uniformity  as  well  as  to 
greater  revenues.  Though  uniformity  in  the  treatment  of 
different  and  non-competing  classes  of  corporations  is  not 
of  vital  importance,  and  may  not  even  be  desirable  in  some 
cases,  such  uniformity  is  unquestionably  better  than  hap- 
hazard differentiation  which  is  not  based  on  any  fiscal 
principle. 

The  administration  of  state  finances  has  been  centralized 
through  separation.  All  assessments  for  state  taxes  are 
under  the  direct  control  of  a  commissioner  of  taxes  who, 
with  a  few  minor  exceptions,  has  powers  adequate  to  fulfil 


Hg   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [412 

his  duties.  Unfortunately  his  supervision  does  not  extend 
to  the  valuation  of  corporate  or  other  property  taxed 
locally,  though  there  is  at  present  a  tendency  to  extend  his 
powers  to  this  field. 

The  revenues  of  the  state  have  been  kept  a  little  in  ad- 
vance of  expenditures  by  means  of  frequent  revision  and 
increase  in  the  rates  of  corporation  taxes,  but  the  growth 
of  expenditures  has  absorbed  increasing  revenues  very 
rapidly,  and  in  the  year  1914  it  was  found  necessary  to  levy 
a  small  direct  tax  to  meet  a  deficit  incurred  during  the  year 
preceding.  There  is  no  expectation  of  permanent  utiliza- 
tion of  this  source,  however.  The  natural  development  of 
corporate  wealth  will  afford  some  increase,  and  manufac- 
turing and  mercantile  corporations,  as  well  as  some  public 
utilities,  are  still  untouched  by  the  state.  To  remove  these 
from  local  taxation  would  at  present  cause  some  hardship, 
even  though  the  localities  reach  them  most  ineffectively,  but 
a  low-rate  tax  on  intangibles  and  the  removal  of  some  of 
the  present  exemptions  might  be  offered  as  compensation. 
Further  the  introduction  of  a  direct  inheritance  tax  and  the 
application  of  progression  to  the  collateral  inheritance  tax 
would  doubtless  create  a  lucrative  source  of  revenue.  Fin- 
ally, an  income  tax  (which  has  been  seriously  recom- 
mended) could  be  made  an  unlimited  source. 

The  state  has  no  appreciable  debt  and  no  stringency  of 
funds  has  yet  been  felt;  but  expenditures  have  followed 
revenues  so  closely  that  it  seems  probable  that  unless  the 
general  property  tax  is  going  to  be  resorted  to  freely,  as 
needed,  some  decisive  action  will  have  to  be  taken  in  a  few 
years. 


CHAPTER  VIII 

PARTIAL  SEPARATION  IN  WEST  VIRGINIA 
I.  HISTORY  OF  TAXATION  IN  WEST  VIRGINIA 

WEST  VIRGINIA  has  in  her  constitution  the  provision, 
which  she  has  tried  in  vain  to  abolish,  that  "  taxation  shall 
be  equal  and  uniform  throughout  the  state,  and  all  property, 
both  real  and  personal,  shall  be  taxed  in  proportion  to  its 
value."  Owing  to  this,  West  Virginia  has  never  been  able 
to  employ  special  corporation  taxes;  but  the  state  has  suc- 
ceeded in  obtaining  large  revenues  from  an  inheritance  tax, 
licenses,  and  franchise  taxes  ( for  which  last  provision  was 
specifically  made  in  the  constitution  in  I872).1  The  income 
from  these  sources  is  almost  sufficient  for  state  needs.  As  a 
result  the  state  general  property  tax,  except  for  school  pur- 
poses, has  been  reduced  until  it  yields  a  comparatively  small 
revenue.  This  is  the  only  instance  of  a  state  attempting, 
with  fair  success,  to  separate  revenues  without  classifying 
property  for  taxation. 

The  fiscal  system  of  West  Virginia  is  based  on  the  gen- 
eral property  tax  and  licenses, — the  usual  form  in  the  south- 
ern states.  At  the  time  that  West  Virginia  was  created  as 
a  separate  state,  in  1863,  the  Virginia  system  was  continued, 
with  the  general  property  tax  for  the  central  tax  of  the  state 
and  of  the  local  systems.  The  amount  of  state  revenue 
which  this  tax  yielded  grew  steadily  until  1905,  but  the 
proportion  of  total  state  revenues  from  this  source  has 
gradually  declined  since  1875 ;  for  while  the  state  direct  tax 
increased  but  little  more  than  one  hundred  per  cent  during 

1  Constitution,  article  x,  sec.  I. 
4i3]  H9 


I2Q   SEPARATION  OF  STATE  AND  LOCAL  REVENUES 

these  thirty  years  the  total  receipts  increased  nearly  five 
hundred  per  cent. 

TABLE  VIII  i 
STATE  GENERAL  PROPERTY  TAX  IN  WEST  VIRGINIA,  1875-1915 

,p.-,/f  nf                 Amount  of  State  Percentage  of  State 

Year                   State  Fund               General  Property  Fund  Yielded 

Tax  by  Property  Tax 

1875 #324>i95                      £244,926  79 

1885 568,785                        262,177  46 

1895 1,135,694                        375,644  33 

'90S 2,352,317*                      58o,994  25 

1915 6,134,897  I,222,000t  20 

*  After  1904  the  state  fund  included  certain  revenues  from  license  taxes  and 
later  from  the  general  property  tax  which  are  transferred  to  the  school  fund  and 
some  from  public  service  corporations  which  are  refunded  to  the  local  districts. 

t  According  to  the  State  Tax  Commissioner  (Second  Annual  Report  of  the 
State  7^ax  Commissioner,  1915-1916,  p.  23)  this  tax  will  be  used  in  the  immedi- 
ate future  only  for  the  cost  of  permanent  improvements  to  state  buildings  and 
institutions.  This  will  reduce  it  materially.  However,  if  West  Virginia  should 
be  forced  to  assume  her  share  of  Virginia's  debt  which  seems  probable  at  the 
present  writing,  the  state  tax  might  again  be  resorted  to  for  large  revenues. 

The  general  property  tax  early  met  with  the  criticism  that 
was  being  accorded  to  it  in  all  parts  of  the  country.  A 
special  tax  commission,  reporting  in  i884,2  estimated  that  the 
amount  of  intangible  property  evading  taxation  was  $50,- 
000,000,  and  that  the  ratio  of  assessed  value  to  selling  price 
in  the  different  counties  varied  from  19  to  226  per 
cent.3  This  commission  also  called  attention  to  the  difficulties 
of  collecting  taxes,  particularly  those  of  the  railroads.  Al- 
though these  were  subject  to  a  certain  amount  of  state  super- 
vision, having  been  assessed  by  the  board  of  public  works, 
and  having  been  required  to  pay  taxes  to  the  state  treasurer, 

Compiled  from  data  in  Biennial  Reports  of  the  Auditor  of  West 
Virginia,  1875-1915. 

*  Preliminary  Report  of  the  West  Virginia  State   Tax  Commission, 
1884. 


415]       PARTIAL  SEPARATION  IN  WEST  VIRGINIA          I2i 

since  1869,  the  auditor  and  county  sheriffs  were  unable  to 
collect  delinquencies.  In  1870  only  one-third  of  the  taxes 
due  were  collected.1  These  difficulties  led  the  counties  to 
compromise  with  the  railroads  for  the  amounts  due  them. 
This  and  the  evasion  of  personalty  resulted  in  throwing  an 
increased  burden  on  real  estate,  until  in  1884  it  was  paying 
65  per  cent  of  all  taxes.2  New  taxes  on  corporation  char- 
ters (1885),  and  on  collateral  inheritances  (1887),  were 
imposed  following  this  report ;  but  no  great  effort  was  made 
to  improve  administration.  Probably  the  burden  of  taxa- 
tion did  not  weigh  sufficiently  heavily. 

The  rate  on  assessed  value  during  this  time  was  high,  but 
this  was  due  to  the  low  rate  of  assessment.  It  has  been 
estimated  3  that  realty  and  tangible  personalty  were  taxed 
at  this  period  at  from  10  to  60  per  cent  of  actual  value. 
In  consequence  this  high  rate  was  not  for  the  most  part  bur- 
densome, although  the  inequalities  were  quite  as  serious 
here  as  in  other  states. 

A  second  tax  commission,  in  1902,  reported  with  more 
effect,4  and  in  1904  a  special  session  of  the  legislature  re- 
vised the  entire  system,  with  the  aim  of  centralizing  the  ad- 
ministration of  the  state  and  local  taxes  and  abolishing,  or  at 
least  greatly  reducing,  the  state  direct  tax, — replacing  it  with 
other  taxes.  To  this  end  a  number  of  measures  were  en- 
acted. A  state  tax  commissioner  with  some  power  of  con- 
trolling local  administration,  was  created ;  but  in  the  absence 
of  the  power  of  appointment  and  removal  his  action  was 
largely  advisory.  He  was,  however,  given  the  power  of 
appointing  special  assessors  for  an  entire  reassessment  of 
real  estate  in  1905  at  its  "  true  and  actual  value,"  instead  of 

1  Preliminary  Report  of  Tax  Commission,  p.  40. 

*West  Virginia,  State  Tax  Commission,  1884,  Final  Report,  p.  40. 

3  Conference,  1910,  p.  168.  *Ibid.,  pp.  167-168. 


I22   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [416 

"  fair  cash  value  "  as  hitherto.  He  was  further  invested 
with  the  power  of  collecting  the  inheritance  tax,  which  had 
up  to  that  time  been  ineffectively  administered  by  county 
officials.  The  assessment  of  all  public-service  corporations 
— instead  of  only  railroads  as  before — was  made  a  duty  of 
the  state  board  of  public  works.  License  taxes  were  revised, 
the  state  tax  on  general  property  was  reduced  to  five  cents  per 
$100  valuation,  and  the  limit  on  the  rate  of  levy  for  local 
purposes  was  further  reduced.1  In  1906,  and  again  in  1908, 
with  the  hope  of  raising  valuations,  the  limits  were  put  still 
lower.2  The  result  of  this  legislation  was,  in  the  five  years 
from  1904  to  1909,  to  increase  the  assessed  value  of  real 
estate  3.43  times,  to  increase  -that  of  personalty  2.75  times, 
and  that  of  public-utility  property  8.75  times.3  As  a  result 
of  this  the  tax  rate  for  all  purposes  was  at  the  same  time 
reduced  from  $2.15  to  85  cents.  The  combined  state  and 
state  school  taxes  were  4.5  cents  in  1910.*  Most  of  the  rev- 
enue thus  collected  was  used  for  school  expenditure, — less 
than  $100,000  being  used  for  state  purposes.  Thus  the  state 
has  successfully  reduced  the  tax  on  general  property,  and  in- 
troduced— as  far  as  the  constitution  will  permit — other 
sources. 

Gross  receipts  taxes  were  levied  on  express  and  insurance 
companies,  beginning  1864,  and  telegraph  companies,  begin- 
ning in  i882.5  The  return  from  these  taxes  was,  however, 
negligible,  except  from  the  tax  on  insurance  companies, 
which  since  1882  has  risen  rapidly.  The  gross  receipts  taxes 

1  Conference,  1910,  pp.  169-170. 

2  The  present  maximum  rates  are  10  cents  for  state  and  state  school 
purposes,  30  cents  for  county,  35  cents  for  municipal,  and  15  cents,  25 
cents,  10  cents  and  5  cents,  respectively,  for  various  local  school  pur- 
poses.    (Wealth,  Debt  and  Taxation,  vol.  i,  p.  101.) 

3  Conference,  1910,  p.  171.  *Ibid.,  p.  173. 

6  Laws  of  West  Virginia  Relating  to  ...  Taxes,  1887,  ch.  xxxiv,  sec.  13. 


417]       PARTIAL  SEPARATION  IN  WEST  VIRGINIA 

on  express  and  telegraph  companies  were  abolished  in  1901, 
and  mileage  taxes  on  foreign  companies  were  established. 
These  are  in  addition  to  the  state  and  local  property  tax. 
In  1904  the  taxation  of  all  public  utilities  was  brought  under 
state  control.1 

License  taxes,  which  were  borrowed  from  the  Virginia 
system,  yielded  more  than  three-quarters  of  a  million  dollars 
before  1914;  but  in  that  year  prohibition  was  introduced,  and 
since  approximately  four-fifths  of  the  revenues  from  licenses 
had  come  from  liquor  licenses,  this  source  is  now  of  slight 
importance.  An  annual  license  tax  on  the  charters  of  cor- 
porations, graded  according  to  the  amount  of  authorized 
capital  stock,  and  differing  for  domestic  and  foreign  cor- 
porations, was  first  imposed  in  1885.  It  has  developed  into 
a  lucrative  source  of  revenue.  The  collateral  inheritance  tax 
law  enacted  in  1887  proved  ineffective  as  long  as  it  was 
under  local  administration ;  but  with  central  administration, 
undertaken  in  1904,  the  yield  was  greatly  increased;  and 
the  revision  of  the  law  and  the  addition  of  a  direct  inherit- 
ance tax,  in  1909,  have  made  it  one  of  the  leading  sources 
of  revenue.  The  present  rates  are  one  to  three  per  cent  on 
direct  inheritances  with  a  $25,000  exemption,2  and  three  to 
five  per  cent  on  collateral  heirs  with  no  exemption.8 

Local  revenues  are  derived  mainly  from  the  general  prop- 
erty tax  although  poll  taxes  are  an  important  source  for 
school  purposes. 4 

2.    EFFECTS  OF  SEPARATION 

West  Virginia  had  the  good  fortune  to  start  free  at  a 
period  when  other  states  were  most  deeply  in  debt.  The 

1  Conference,  1910,  p.  170. 

2  For  the  estate,  not  the  individual  bequest. 

3  Conference,  1910,  p.  289. 

Wealth,  Debt  and  Taxation,  1913,  vol.  ii. 


124  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [418 

period  of  extensive  borrowing  for  internal  improvements  and 
for  the  encouragement  of  private  enterprise  was  over,  and 
the  Civil  War  was  nearly  ended.  The  third  of  Virginia's 
debt  which  was  assigned  to  the  new  state  she  refused  to 
assume.  In  consequence  no  appreciable  debt  has  ever  ac- 
cumulated, and  since  1895  the  state  has  been  totally  free 
from  debt.1  This  freedom  from  handicap  has  been  the 
chief  cause  of  West  Virginia's  prosperous  financial  condition. 
and  has  made  the  small  general  property  tax  possible  with- 
out the  imposition  of  heavy  corporation  taxes.  The  local 
governmental  cost  payments  (including  counties  and  all 
local  districts  of  over  2500  population)  were,  in  1913. 
$18.50  per  capita.1  Only  five  states  had  lower  costs  per 
capita,  and  taking  state  and  local  payments  together  only 
two  states,  Alabama  and  New  Mexico,  paid  out  less  than 
West  Virginia.  The  local  per  capita  general  property  tax 
was  smaller  in  only  seven  states.  These  small  revenues  and 
expenditures  are  not,  of  course,  solely  due  to  early  freedom 
from  debt  The  state  has  not  extended  its  activities  as 
rapidly  as  most  of  the  neighboring  states. 

The  per  capita  general  property  tax  was.  in  1912,  $7.67.* 
Nine  states  had  a  lower  per  capita  rate  at  this  time.  The 
average  rate  on  assessed  valuation  was  86  cents  per  $100. 
This  is  lower  than  that  of  any  other  state,  the  next  lowest 
being  $1.02  (in  Kansas).  If  assessed  values  are  only  49.7 
per  cent  of  true  value,  this  makes  a  tax  rate  on  real  value  of 
41.1  cents.  No  state  has  a  smaller  rate  on  actual  value. 

The  burden  of  the  general  property  tax  has  always  been 

1  Wealth,  Debt  and  Taxation,  vol.  i,  pp.  216-217.  In  1912  West 
Virginia  was  the  only  state  without  a  debt  though  in  Pennsylvania 
the  assets  of  the  sinking  fond  exceeded  the  debt,  {Wealth,  Debt  and 
Taxation,  1913,  voL  i,  passim.) 

1  From  data  in  Wealth,  Debt  and  Taxation,  1913,  voL  ii. 


PARTIAL  SEPARATION  IN  WEST  VIRGINIA 

light,  but  the  assessment  has  not  always  been  accurate.  The 
ratio  of  assessed  value  to  actual  value  is  still,  according  to 
the  census  report,1  only  49.7  per  cent  (1912),  but,  beginning 
in  1904,  the  state  has  taken  heroic  measures  to  attain 
equality,  and  the  increased  limitations  on  the  tax  rates  and 
the  centralization  of  administration,  have  tended  to  equalize 
assessment  ratios,  and  probably  to  raise  them.2 

Central  control  has  been  well  developed.  The  state  tax 
commissioner,  appointed  in  1904,  collects  the  inheritance  tax 
and  some  of  the  licenses.  He  also  has  general  control  of 
other  taxes,  although  he  acts  chiefly  in  an  advisory  capacity, 
— meeting  with  the  board  of  public  works,  offering  sugges- 
tions and  requiring  reports  from  local  financial  officials,  and 
requiring  them  to  keep  levies  below  the  maximum  limit. 
County  assessors  are  still  elected,  and  these  value  corporate 
property,  other  than  that  of  public  service  corporations,  as 
well  as  that  of  private  individuals ;  but  the  assessments  made 
by  the  state-appointed  assessors  in  1905  have  at  least  given 
them  a  standard  for  their  work  for  a  time.  All  of  the  prop- 
erty of  public  service  corporations  is  assessed  by  the  board 
of  public  works,  which  is  made  up  of  state  officials.  There 
is  no  state  board  of  equalization,  but  appeals  from  the 
county  boards  to  the  circuit  court  are  provided  for.3 

This  system  has  supplied  the  state  with  ample  revenues. 
Not  only  has  the  state  no  debt,  but,  in  1912,  the  cash  and 
securities  of  the  state  were  in  excess  of  two  and  a  half 

1  Wealth,  Debt  and  Taxation,  1913,  vol.  i,  p.  16. 

2  The  state  tax  commissioner,  while  quoting  no  definite  ratios  asserts 
that  the  ratio  of  assessed  to  true  value  has  been  raised  decidedly.     {Con- 
ference, 1910,  p.  171;  1909,  p.  347).    He  is  further  quoted  by  the  com- 
missioner of  corporations  (Bureau  of  Corporations,  Taxation  of  Cor- 
porations, pt.  vi,  1915,  p.  69)  as  putting  the  ratio  of  assessed  to  actual 
value  at  70  per  cent.    The  increase  of  taxable  values  would  seem  to 
support  this  statement. 

3  Conference,  1910,  p.  168. 


I26   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [420 

million.  The  adoption  of  prohibition  in  1914  is  cutting 
down  revenue,1  and  the  state,  although  up  to  this  time  it 
h->.s  been  somewhat  backward  in  governmental  activities,  is 
r  N  beginning  to  expand  its  functions.  Even  so  there 
seems  to  be  no  immediate  danger  of  shortage  of  revenues. 

West  Virginia  is  far  from  having  abolished  the  state  gen- 
eral property  tax.  The  state  derives  only  a  very  small  por- 
tion of  its  revenues  for  strictly  state  purposes  from  the 
locally  administered  general  property  tax;  but  if  the  school 
tax — which  is  paid  to  the  state  and  then  distributed  accord- 
ing to  the  number  of  children  of  school  age  in  each  district 
—is  included,  it  amounts  to  fourteen  per  cent  of  total 
revenues.  If,  further,  the  tax  on  public  service  corpor- 
ations is  included, — and  this  tax  is  distinctly  an  ad  valorem 
tax  (differing  from  the  tax  on  other  property  only  in  being 
centrally  administered),  the  general  property  tax  may  be 
said  to  equal  twenty  per  cent  of  the  revenues  of  the  state 
fund.2  To  this  extent  sources  are  not  separated.  How- 
ever the  other  eighty  per  cent  is  quite  separate;  license 
taxes,  the  taxes  on  insurance  companies,  and  the  collateral 
inheritance  tax  are  distinctly  state  taxes.  West  Virginia 
has  been  striving  consciously  to  attain  separation  under  the 
handicap  of  a  constitutional  provision  preventing  classifica- 
tion for  taxation.  If  the  state  should  succeed  in  removing 
this  barrier,  as  it  is  trying  to  do,  it  seems  probable  that 
separation  will  be  completed. 

*By  approximately  $1,000,000:  one  quarter  of  a  million  for  the  locali- 
ties and  three  quarters  for  the  state. 

2  Exclusive  of  that  part  of  the  public-service  corporation  revenues 
returned  to  the  localities.  (Estimated  from  Auditors'  Reports.} 


CHAPTER  IX 

SEPARATION  IN  CALIFORNIA 

I.  INTRODUCTION 

CALIFORNIA  alone  of  those  states  achieving  separation 
of  revenues  accomplished  it  at  one  move.  In  all  of  the 
other  states  the  change  was  gradual.  Special  state  taxes, 
particularly  special  corporation  taxes,  were  experimented 
with  first,  when  they  were  found  to  provide  sufficient 
revenues  for  state  use  the  general  property  tax  was  grad- 
ually reduced,  and  finally  omitted  altogether. 

The  constitution  of  California,  after  its  revision  in  1879, 
did  not,  as  did  many  state  constitutions,  require  that  taxa- 
tion be  "  equal  and  uniform,"  but  it  did  provide  that  "  all 
property  in  the  State  .  .  .  shall  be  taxed  in  proportion  to 
its  value"  1  This  was  interpreted  to  mean  the  same  thing, 
and  so  prevented  classification  for  taxation.  Without  clas- 
sification separation  was  impossible.  A  clause  preventing 
the  release  of  the  local  divisions  from  their  proportionate 
share  of  state  taxes  was  a  further  barrier.2 

Prior  to  1910  almost  no  special  taxes,  aside  from  inheri- 
tance and  poll  taxes,  were  employed.  Corporations  paid 
fees  and  annual  licenses,  but  their  property  was  taxed  under 
the  general  property  tax  locally  administered — except  that 
the  franchise,  roadway,  roadbed,  rails,  and  rolling  stock  of 
railroads  operating  in  two  or  more  counties,  although  taxed 
as  other  property,  was  assessed  by  state  officials.  The  only 

1  Constitution,  sec.  i,  art.  xiii. 

2  Ibid.,  sec.  10,  art.  xi. 

421]  127 


I2g   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [422 

special  corporation  tax  was  one  on  the  premiums  of  foreign 
insurance  companies. 

The  people  of  the  state  amended  the  constitution  in  1910, 
following  the  recommendation  of  the  commission  on  reve- 
nue and  taxation,  by  repealing  all  of  the  clauses  preventing 
separation,  and  at  the  same  time,  not  satisfied  to  leave  the 
development  of  new  methods  of  taxation  to  the  action  of 
the  legislature,  they  devised  and  incorporated  in  the  consti- 
tution an  entire  new  system  of  state  taxation  involving  the 
separation  of  sources  of  state  and  local  revenues. 

2.    HISTORY  OF  TAXATION  IN  CALIFORNIA 

The  general  property  tax  was  introduced  in  California 
in  1850,  the  first  year  of  its  existence  as  a  state.  The  other 
sources  of  revenue  devised  in  that  year  were  a  poll  tax,  a 
military  commutation  tax  and  a  number  of  licenses.  These 
taxes,  excepting  a  license  tax  on  foreign  miners,  were 
locally  administered,  and  the  local  divisions  shared  in  them.1 
All  assessments  of  property  were  subject  to  review  by  the 
court  of  sessions  (later  by  the  county  board  of  supervisors), 
acting  as  a  county  board  of  equalization,  but  inequalities 
were  complained  of  from  the  beginning.  In  1869  the  state 
controller  asserted  that  some  land  was  assessed  as  low  as 
10  per  cent  of  actual  value,  and  that  the  inequalities  within 
counties  were  so  great  that  equalization  by  a  state  board, 
which  was  then  being  advocated,  would  scarcely  touch  the 
difficulty.2  Such  a  board  was  created,  however,  in  1870. 
The  investigations  of  this  board  revealed  the  fact  that  some 
land  was  assessed  as  low  as  4  per  cent  of  real  value,  and 
that  the  county  boards  of  equalization,  when  equalizing  at 

1  W.  C.  Fankhauser,  "  Financial  History  of  California."     University 
of  California  Publications  in  Economics,   vol.  iii,  no.  2,   1913,   ch.  2, 
passim. 

2  Biennial  Report  of  the  State  Controller,  California,  1867-69,  p.  10. 


423]  SEPARATION  IN  CALIFORNIA 

all,  were  doing  so  by  reducing  valuations  of  the  assessors. 
The  ratio  varied  between  different  counties,  from  15  to 
80  per  cent,  and  was  estimated  to  average  42  per  cent.1  In 
1872  the  powers  of  the  state  board  of  equalization  were 
enlarged  so  as  to  permit  it  to  make  additions  to,  or  deduc- 
tions from,  individual  assessments — with  the  result  that  the 
total  valuation  of  property  in  the  state  was.  more  than 
doubled  in  that  year ;  but  these  powers  were  removed  in  the 
following  years,  until  by  1876  the  board  became  a  purely 
advisory  body.2  Largely  in  consequence  of  this,  valuations 
dropped  (1874)  more  than  $100,000,000.  With  the  new 
constitution  of  1879  and  the  act  of  1880  the  state  board  of 
equalization  was  invested  with  the  powers  of  equalization 
by  counties,  and  assessment  of  part  of  the  property  of  rail- 
ways,3 which  last  had  hitherto  rested  in  local  hands.  The 
board  was  not  permitted,  however,  to  raise  or  to  lower  in- 
dividual assessments,4  and  assessed  valuations  remained  low 
and  unequal.  They  were  estimated  to  average  60  to 
70  per  cent  in  i882,r>  75  per '  cent  in  i888,6  and 
50  to  60  per  cent  in  ic)o6.7  Furthermore,  under  this 
system  real  estate  everywhere  was  bearing  an  undue  share 
of  the  taxes  as  compared  with  personalty.  It  is  not  un- 
reasonable, in  the  light  of  earlier  assessment  returns,  to 
suppose  that  personalty  should  amount  to  at  least  fifty  per 
cent  of  the  total  assessment  roll,  yet  in  1905  real  estate  paid 
85  and  personalty  15  per  cent  of  the  entire  state  tax, 

^ankhauser,  op.  cit.,  p.  191.  zlbid.,  p.  238. 

3  General  Code,  sec.  3665. 

4  Wells,  Fargo  and  Company  vs.  the  State  Board  of  Equalization,  56 
Cal.  194- 

5  Report  of  the  California  State  Board  of  Equalization,  1882,  p.  8. 

6  Ibid.,  1888,  pp.  4-5. 

''Report  of  the  Commission  on  Revenue  and  Taxation  of  California, 
1006,  p.  63. 


I30   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [424 

while  in  1860  real  estate  had  paid  54,  and  personalty  46  per 
cent.  From  1872  to  1903  the  personal  property  on  the 
assessment  roll  remained  stationary,  while  the  assessed 
value  of  real  property  increased  more  than  threefold.  It 
was  estimated  that  farmers  were  paying  a  tax  equivalent  to 
ten  per  cent  of  their  income,  while  the  tax  on  manufacturers 
was  only  equivalent  to  a  two  per  cent  income  tax.1 

Such  was  the  administration  of  the  general  property  tax. 
which  was  supplying  more  than  half  of  the  state's  revenue. 
Corpo rations,  except  foreign  insurance  companies,  were,  as 
stated  above,  taxed  entirely  under  this  tax,  aside  from 
minor  licenses  and  incorporation  fees. 

Until  1879  all  railroad  property  had  been  locally  as- 
sessed. The  lack  of  uniformity  and  equality  resulting-  from 
this  method  led,  in  1879,  to  putting  into  the  hands  of  the 
state  board  of  equalization  the  assessment  of  part  of  the 
property  of  railroads  operating  in  more  than  one  county. 
The  collection  of  the  taxes  was  left  at  first  to  county  offi- 
cials, but  owing  to  the  trouble  made  by  the  railroads  these 
supervisors  often  accepted  smaller  sums  than  were  due  lest 
they  secure  nothing  at  all.  In  1883  the  state  controller  was 
made  responsible  for  the  collection  of  these  railroad  taxes 
and  better  results  were  obtained ;  however,  there  was  still  a 
great  deal  of  litigation,  based  largely  on  the  question  of 
whether  or  not  a  state  might  tax  a  railroad  incorporated 
under  the  laws  of  the  United  States.  This  was  finally  set- 
tled in  favor  of  the  state  2  and  back  taxes  were  paid  in 
1894.  The  system  of  taxing  railroads,  as  it  stood  before 
the  amendment  of  1910,  was  as  follows:  All  railroad  prop- 
erty operated  in  more  than  one  county,  i.  e.,  the  franchise, 

1  Transactions   of   the   Commonwealth   Club    of   California,    vol.   iii, 
1908,  p.  104. 

2  People  vs.   Central   Pacific   Railroad   Company,    105  Cal.   576,   and 
Central  Pacific  Railroad  Company  vs.  California,  162  U.  S.  91. 


425]  SEPARATION  IN  CALIFORNIA 

roadway,  roadbed,  rails  and  rolling  stock — was  assessed  by 
the  state  board  of  equalization,  this  assessment  being  ap- 
portioned among  the  counties  and  local  divisions  in  propor- 
tion to  the  railroad  mileage  in  each.  Until  1906  the  board 
attempted  to  ascertain  the  actual  value  of  railroad  property, 
but  after  1906  it  substituted  an  assessed  valuation  which, 
when  added  to  the  valuation  placed  on  locally  assessed 
operative  property,  would  yield,  at  the  tax  rate  of  the  pre- 
vious year,  a  sum  equal  to  four  per  cent  of  gross  receipts 
from  operation.  This  method  was  easier  to  apply  and  the  re- 
sults were  believed  to  be  substantially  the  same.  The  as- 
sessment of  all  other  property  was  left  to<  local  assessors. 
All  state  and  county  taxes  levied  upon  the  assessments 
made  by  the  state  board  were  paid  directly  by  the  railroad 
to  the  state,  which  paid  to  the  counties  their  share,  levied 
at  the  rate  on  other  property  in  each  county.1 

In  addition  to*  these  taxes,  the  railroad  paid  directly  to 
the  counties,  taxes  on  the  property  assessed  by  the  counties, 
and  to  the  cities,  and  to  the  counties  for  special  school  pur- 
poses, taxes  levied  both  on  the  mileage  and  on  other  prop- 
erty in  the  cities  or  in  the  school  districts.  State  adminis- 
tration, as  far  as  it  went,  was  fairly  satisfactory.  The  total 
yield  from  this  source  in  1904  was  nearly  $2,000,000.  But 
the  system  was  unnecessarily  complex.  Street  railroads 
were  assessed  locally  and  taxed  in  much  the  same  manner 
as  other  property. 

The  Pullman  Company  and  some  other  car  companies, 
before  1910,  were  assessed  by  the  state  board  of  equaliza- 
tion, the  assessment  being  based  on  the  number  of  cars 
operated  within  the  state  during  the  year  and  the  state's 
proportion  of  those  used  in  interstate  business.  They  paid 

1  For  a  discussion  of  the  methods  of  taxing  railroad  and  other  cor- 
porate property  before  1910,  see  the  Report  of  the  Commission  on 
Revenue  and  Taxation,  1906,  passim. 


I32   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [426 

taxes  on  that  assessment  as  well  as  on  local  assessments  in 
the  same  manner  as  railroads.  The  amount  paid  in,  in 
1905,  was  $18,831,  the  larger  part  of  which  was  paid  by 
the  Pullman  Company. 

Other  car,  freight  and  express  companies  came  under  the 
law  of  1905  imposing  an  annual  license  tax  on  all  corpora- 
tions. They  also  paid  license  taxes  in  some  cities.  In  addi- 
tion, state  and  local  divisions  obtained  what  they  could 
through  the  general  property  tax.  In  1905  express  com- 
panies paid  in  taxes,  exclusive  of  licenses,  less  than  $15,000, 
most  of  which  was  paid  by  Wells,  Fargo  and  Company. 
Many  of  the  small  companies  escaped  entirely. 

Telegraph  and  telephone  companies  were  assessed  locally 
and  taxed  under  the  general  property  tax.  In  addition,  the 
telephone  companies  were  subject  to  local  licenses.  Under 
this  system  the  taxes  on  telephone  companies  amounted  to 
2.65  per  cent  of  gross  earnings;  those  on  telegraph  com- 
panies equaled  1.66  per  cent. 

Light,  heat,  and  power  companies  were  likewise  assessed 
and  taxed  under  the  general  property  tax.  Their  taxes 
amounted  to  about  3.03  per  cent  on  gross  earnings. 

Under  the  same  system  water  companies  in  1905  paid 
7.09  per  cent  on  gross  earnings,  except  the  Spring  Valley 
Water  Company,  which  paid  16.09  Per  cent.1 

The  provisions  for  the  taxation  of  banks  before  the 
amendment  were  difficult  to  apply  and  unjust  when  applied, 
and  the  results  were  most  unsatisfactory.  National  banks, 
owing  to  the  conflict  between  California,  and  federal  stat- 
utes, could  be  taxed  only  on  real  estate.  The  revenue  laws 
were  amended  in  1899  to  reach  such  banks  more  effectively, 
but  the  amendment  proved  defective  and  was  finally  de- 

1  No  objection  was  made  to  this  heavy  tax  since  the  company  was 
permitted  to  charge  rates  yielding  a  "  fair  return  "  on  capital,  and  thus 
easily  compensated  itself  for  the  loss  in  taxes.  (Commission  on 
Revenue  and  Taxation,  1906,  p.  216.) 


427]  SEPARATION  IN  CALIFORNIA 

clared  unconstitutional,  in  1904,  on  the  ground  that  it  dis- 
criminated against  national  banks,  inasmuch  as  they  were 
taxed  on  the  value  of  shares,  which  includes  good  will,  and 
state  banks  were  taxed  on  property,  which  does  not  include 
good  will.  No  further  attempt  was  made  to  tax  the  na- 
tional banks  except  on  their  real  estate,  and  in  consequence 
they  were  paying  in  taxes  less  than  one-fifth  of  what  they 
would  have  paid  if  assessed  as  other  property. 

State  commercial  banks  paid  taxes  on  all  property,  with 
the  privilege  of  deducting  debts  from  solvent  credits.  Since 
the  bank's  debts,  which  included  the  amount  owed  to  de- 
positors, generally  exceeded  the  credits,  their  deduction  left 
nothing,  or  at  least  very  little,  which  could  be  taxed.  The 
deposits  were  taxed  to  the  depositors,  and  as  they  were 
rarely  reported  a  large  amount  of  taxable  property  (equal 
to  about  one-fifth  of  the  total  assessment  roll)  escaped. 
The  tax  on  general  franchises  was  applied  to  these  banks, 
the  valuation  being  made  by  subtracting  the  value  of  tan- 
gible and  exempt  property  from  the  market  value  of  the 
stock,  and  assessing  the  remainder  at  a  fraction  (about 
one- fourth)  of  the  value  attained  to  allow  for  the  under- 
assessment of  other  property  and  to  avoid  taxing  good-will. 
The  banks  paid  this  under  protest,  claiming  that  good-will 
which  should  not  be  taxed  was  included,  but  one  decision  * 
stated  that  all  corporate  excess  was  taxable  even  though  it 
included  good-will. 

Savings  banks  were  taxed  in  the  same  way,  except  that 
their  solvent  credits  were  taxed  without  allowance  for  de- 
posits. The  result  was  that  they  were  paying  a  much 
higher  tax  than  the  commercial  banks,  although  their  tax 
was  not  excessive. 

In  1905  the  taxes  levied  on  national  banks  in  California 
equaled  twenty  cents  on  one  hundred  dollars  of  capital; 

1  Bank  of  California  vs.  San  Francisco,  142  Cal.  276. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [42g 

those  on  state  commercial  banks  equaled  eighty  cents  on 
one  hundred  dollars ;  and  those  on  savings  banks  amounted 
to  one  dollar  and  twenty-five  cents. 

Another  objectionable  feature  of  this  system  of  taxation, 
in  addition  to  its  inequitableness  and  inadequacy,  was  the 
restriction  on  the  field  of  investment.  Owing  to  the  ad- 
vantage of  owning  the  untaxed  stocks  and  bonds  o*f  Cali- 
fornia corporations  there  was  a  tendency  to  exclude  foreign 
capital.1 

The  taxation  of  insurance  companies  before  1910  was 
characterized  by  a  lack  of  uniformity.  There  was  discrimi- 
nation between  life-  and  fire-insurance  companies,  between 
domestic  and  foreign  insurance  companies,  and  between 
foreign  insurance  companies  of  different  states.  Foreign 
insurance  companies  were  subject  to  the  only  special  cor- 
poration tax  in  California — a  tax  on  gross  premiums.2 
The  method  of  taxing  foreign  life-insurance  companies 
was  slightly  different  from  that  of  taxing  other  foreign  in- 
surance companies,  although  the  burden  of  the  tax  was 
approximately  equal  on  both.  Owing  to  a  retaliatory  pro- 
vision only  companies  incorporated  in  Connecticut,  New 
Hampshire  and  Minnesota,  which  had  the  lightest  insurance 
taxes,  came  under  the  rate  provided.  All  domestic  insur- 
ance companies  were  taxed  under  the  general  property  tax. 
In  addition,  agents  or  companies  were  subject  to  local 
license  taxes.  Under  this  system  the  companies  paid,  in 
1905,  $148,000. 

Industrial  corporations  in  California  were  taxed  entirely 
under  the  general  property  tax  before  the  amendment  of 
1910.  The  franchise  value,  which  was  recognized  as  a 

1  Report  of  Commission  on  Revenue  and  Taxation,  1906,  p.  239  et  seq. 

'This  tax  was  imposed  by  laws  of  1903  and  1904.  A  gross  premium 
tax  on  foreign  insurance  companies  had  also  been  levied  for  a  brief 
period  once  before  (1864-1872).  (Fankhauser,  op.  cit.,  p.  201.) 


429]  SEPARATION  IN  CALIFORNIA 

value  arising  from  the  privilege  of  corporate  existence 
(with  or  without  special  privilege)  common  to  all  corpora- 
tions, was  specifically  included  in  the  value  thus  taxed.1 
Assessments  under  this  method  were  most  irregular.  Many, 
and  in  some  years  most,  counties  reported  no  assessable 
franchises,  although  they  doubtless  possessed  some.  Fur- 
ther, the  amount  assessed  varied  greatly  from  year  to  year. 
In  1896,  for  example,  the  value  assessed  was  but  little  more 
than  a  quarter  of  the  value  two  years  before.2  An  incor- 
poration fee,  graduated  according  to  capitalization  (some- 
times referred  to  as  a  tax  on  the  franchise  "  to  be  ")  was 
also  imposed. 

The  remainder  of  the  revenue  for  state  purposes  was  ob- 
tained from  the  poll  and  inheritance  taxes,  fees,  and  in- 
come from  state  lands,  institutions  and  other  property.  The 
poll  tax  was  an  annual  state  tax  of  two  dollars.  It  was 
estimated  that  about  one-half  of  the  men  subject  to  the  tax 
avoided  paying  it.3  The  inheritance  tax  was  at  first  (begin- 
ning 1893)  levied  on  collateral  heirs  only,  but  in  1905  it 
was  extended  to  all  heirs,  and  the  tax  was  graduated. 

The  revenue  from  these  sources,  together  with  that  from 
corporation  license  taxes  and  taxes  on  insurance  premiums 
constituted  the  revenue  from  separate  sources,  which  formed 
a  large  and  gradually  increasing  part  of  the  total  state  in- 
come before  1910.  It  amounted  to  about  thirty  per  cent  of 
the  total  revenue  in  1900,  and  about  forty-four  per  cent  in 


Aside  from  the  difficulties  everywhere  encountered   in 
trying  to  use  the  general  property  tax  as  the  central  state  tax, 

1  Report  of  Commission  on  Revenue  and  Taxation,  1906,  p.  267  et  seq. 

2  Ibid.,  p.  58  et  seq.     See  also  C.  C.  Plehn,  "  Taxation  of  Franchises 
in  California,"  National  Municipal  Review,  vol.  i,  no.  3,  p.  34. 

1  Report  of  the  Commission  on  Revenue  and  Taxation,  1906*  p.  48.' 
*  Computed   from  data  in  the  Reports  of  the  State  Controller  for 
these  years. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [430 

evils  resulted  from  this  system  which  were  peculiar  to  Cali- 
fornia.1 In  a  state  where  population  is  evenly  distributed 
and  conditions  are  fairly  homogeneous  the  system  might 
have  worked  very  well.  But  in  California  there  are  two 
large,  thickly  populated  commercial  regions,  and  outside  of 
these  a  vast  area  which  is  agricultural  or  mountainous,  and 
sparsely  settled.  Whenever  an  attempt  was  made  in  one  of 
these  commercial  centers  to  tax  the  franchise  of  a  corpor- 
ation the  corporation  simply  moved  its  "  head  office "  to 
some  rural  place  where  the  assessor  could  not  reach  it.2 

An  even  greater  evil  resulted  from  allowing  the  counties 
to  collect  a  tax  from  railroads  according  to  the  mileage  with- 
in the  county.  There  are  three  gateways  of  traffic  in  Cali- 
fornia which  take  the  through  lines  east  over  large  unin- 
habited areas.  The  result  of  subjecting  these  lines  to  local 
taxation  was  to  give  large  sources  of  revenue  to  counties 
having  little  need  of  money  and  contributing  little  to  the 
value  of  the  sources  which  they  tapped.  San  Francisco 
County  taxed  twelve  miles  of  railway  while  San  Bernardino 
County  taxed  seven  hundred  miles.  San  Francisco  County, 
in  1910,  received  1.5  cents  per  capita  from  railroad  taxes 
while  San  Bernardino  County  received  $2.68.  Some  coun- 
ties received  even  more  than  San  Bernardino  per  capita,  the 
highest  obtaining  nearly  $4.  San  Francisco's  railroad  tax 
that  year  amounted  to  0.073  Per  cent  °f  ner  property  tax; 
Placer  County's  equaled  37.6  per  cent.3 

Another  evil  of  the  system,  similar  to  the  one  just  men- 
tioned, was  that  the  large  power  plants  in  the  Sierras  brought 
in  a  disproportionately  large  revenue  to  the  sparsely  settled 
counties  in  which  they  were  located.4 

1  Conference^,  1911,  p.  115. 

2  This  has  also  occurred  in  New  York.    Report  of  the  Joint  Legis- 
tive  Committee  on  Taxation,  1916,  p.  93. 

3  Computed  from  data  in  Controller's  Report,  1909-1910. 

4  Conference,  1911,  p.  117. 


43  1  ] 


SEPARATION  IN  CALIFORNIA 


TABLE  IX  l 

CALIFORNIA  STATE  REVENUES,  1900,  1910 

Source  Amount  1900  Per  cent  1900    Amount  1910  Per  cent  1910 

Total  ...........  ...  $10,290,866  loo  $16,931,166 


General  Property 
Railroad 
Separate  Sources 


6,797,034 

278,335 

3,215,497 


66 

3 
31 


8,436,048 

437,744 
8,058,175 


Total, 


FROM  SEPARATE  SOURCES 
#3,215,497  loo 


Poll 

Inheritance 

Insurance 

Corporation  License, 
Other 


50,038 


12 
2 


2,375>723 


73 


883,640 


5,305>6i2 


100 
50 

2 
48 


100 

8 

5 

9 

67 


Before  separation  local  revenues  were  obtained  principally 
from  the  general  property  tax.  The  county  and  state  prop- 
erty taxes  were  based  on  the  same  assessment;  but  cities 
often  reassessed  their  property  at  a  higher  rate  in  order  to 
keep  their  tax  rate  below  the  limit  imposed  by  their  charters. 

In  the  year  1909-10  the  towns  obtained  $20,000,000  from 
property  taxes, — this  being  nearly  two-thirds  of  their  total 
ordinary  revenues.2  The  remainder  was  derived  from 
licenses,  fees  and  fines.  The  counties  in  the  same  year 
obtained  from  ths  source  $26,000,000,  just  two-thirds  of 
their  ordinary  receipts.  They  also  obtained  $6,500,000  as 
subventions  on  account  of  railroad  taxes  collected  by  the 
state,  and  as  aid  to  schools.  Other  important  sources  of 
county  revenue  were  licenses,  fees,  fines,  interest  on  county 
moneys,  commissions,  and  county  poll  taxes. 

3.    ACHIEVEMENT  OF  SEPARATION  IN   1910 

As  early  as  1894  the  growing  dissatisfaction  with  the 

1  Compiled  from  data  in  Controller's  Reports. 

*  Annual  Report   of  Financial   Transactions   of  Municipalities   and 
Counties  for  the  Year  1911,  passim. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [432 

existing  revenue  system  resulted  in  the  appointment,  by  the 
legislature,  of  a  committee  of  investigation.  The  recom- 
mendations of  this  committee  were  acted  upon  by  the  legis- 
lature but  failed  to  produce  any  desired  reform.1  The  mat- 
ter came  up  again  in  1899,  when  a  committee  of  three 
senators  was  appointed  by  the  legislature.  This  committee 
investigated,  and  reported  in  1901,  but  its  recommendations 
were  rejected.2  In  1903  Governor  Pardee  in  his  inaugural 
address  recommended  further  investigation  with  a  view  to 
fiscal  reform.2  He  advised  a  gradual  rather  than  a  radical 
change  in  the  system.  This  was  followed  in  1904  by  the 
endorsement  by  the  Commonwealth  Club  of  California  of 
the  propositions  ( i )  to  abandon  the  attempt  to  support  all 
of  the  departments  of  government  by  the  same  method; 
(2)  to  give  up  the  endeavor  to  reach  intangible  personalty 
in  the  hands  of  the  owners;  and  (3)  to  cease  trying  to  use 
the  general  property  tax  for  both  state  and  local  purposes.3 

In  1905  Governor  Pardee  urged  the  legislature  to  propose 
a  series  of  amendments  to  the  constitution  increasing  the 
powers  of  the  legislature  in  matters  of  taxation,  and  as  a 
result  of  this  an  act  was  passed  by  the  legislature  creating  a 
commission  on  revenue  and  taxation  for  the  purpose  of  in- 
vestigating the  revenue  system  and  recommending  a  plan  of 
revision.  This  commission  was  composed  of  two  senators, 
two  assemblymen.  Professor  Carl  C.  Plehn  and  the  gov- 
ernor as  chairman.  After  examining  the  systems  used  in 
other  states  and  investigating  conditions  in  California  the 
commission  published  a  report  of  its  findings  in  1906.  The 
plan  of  revision  recommended  was  the  separation  of  the 
sources  of  state  and  local  taxes  and  the  ultimate  abandon- 

1  Fankhauser,  op.  cit.,  p.  368.  2  Ibid.,  p.  369. 

8  Commonwealth  Club,  vol.  i,  June,  1904. 


433]  SEPARATION  IN  CALIFORNIA 

ment  of  the  general  property  tax  by  the  state.1     A  constitu- 
tional amendment  was  necessary  to  effect  this. 

The  legislature  adopted  a  resolution  proposing  the  neces- 
sary amendment  in  March  1907.  It  was  submitted  to  the 
people  in  November  1908,  but  was  defeated  by  a  majority 
of  more  than  25,000  votes.2  The  defeat  was  believed  to 
be  due  largely  to  the  political  intrigues  of  corporations  and 
interests  whose  taxes  would  be  increased  by  the  new  system  3 
although  almost  the  only  undisguised  opponents  were  the 
city  assessors,  whose  services,  it  was  supposed,  would  be  dis- 
pensed with  under  the  new  system,  since  the  expected  rise 
in  the  assessment  ratio  would  make  unnecessary  the  separate 
valuation  of  city  property  to  keep  the  tax  rate  below  the 
limits  set  by  the  city  charters.  Some  opposition  came  from 
the  Commonwealth  Club  of  California  because  it  was  felt 
that  an  income  tax  on  corporations  would  be  fairer,  and 
because  no  change  was  made  in  the  manner  of  electing  the 
state  board  o<f  equalization  whose  members,  it  was  urged, 
should  be  elected  at  large.  There  was  also  a  fear  that  the 
burden  of  taxation,  even  though  as  heavy  on  corporate  as  on 
other  property  when  the  law  was  first  enforced,  would  not 
remain  so,  since  the  rates  were  fixed  in  the  constitution; 
moreover  the  corporation  tax  was  a  state  tax,  and  state  taxes 
are  not  increasing  as  rapidly  as  local  taxes.  Professor 
Plehn's  answer  to  this  last  objection  was  that  while  the  rate 
was  fixed  the  amount  of  the  taxes  grew  with  the  increased 
earnings  of  the  corporations,  and  while  the  local  taxes  were 
increasing  very  rapidly  it  was  proper  that  local  property 
should  bear  the  burden  of  local  expenditure, — in  brief  that 
a  just  system  is  not  one  which  taxes  all  property  at  the  same 

1  Report  of  Commission  on  Revenue  and  Taxation,  1906,  p.  77  et  seq. 

2  Ibid.,  1910,  p.  12.  3  Conference,  1911,  p.  120. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [434 

rate,  but  rather  one  which  places  the  burden  where  the  bene- 
fit is  received, — when  such  benefit  is  direct  and  measurable 
as  it  is  in  a  large  degree  in  local  systems.1 

The  principal  defects  pointed  out  in  the  1908  amendment 
were  matters  of  detail,  viz.,  that  ( i )  no  provision  was  made 
for  meeting  a  deficit  in  case  of  insufficient  revenues;  that 
(2)  the  amendment  was  not  clear  concerning  the  liability 
of  withdrawn  public-service  corporations  to  taxation  to  pay 
their  share  of  the  interest  and  principal  on  past  bonded  in- 
debtedness of  local  divisions;  that  (3)  should  a  deficiency 
tax  be  found  necessary  the  corporations  taxed  for  state 
purposes  would  be  exempted,  and  this  would  place  too  heavy 
a  burden  on  the  remaining  property;  and  finally  that  (4)  no 
provision  was  made  for  changing  the  rates  should  they  be 
found  unfair.3 

A  second  amendment  obviating  these  difficulties  was  then 
proposed  by  the  commission  3  and  adopted  by  the  legislature 
of  1909.  This  was  voted  on  and  ratified  by  the  people  on 
November  8,  1910,  by  a  majority  of  45,000  votes.4 

The  amendment  thus  adopted  provided  for  the  complete 
separation  of  the  sources  of  state  and  local  taxes.  The  sub- 
jects taxed  exclusively  for  state  purposes  were  public  utili- 
ties (except  water  companies),  banks,  insurance  companies, 
and  the  franchises  of  all  other  corporations.  All  public 
utilities  were  to  be  taxed  a  specified  percentage  of  gross  re- 
ceipts from  operation  within  the  state.  The  gross  receipts 

1  Commonwealth  Club,  May  1908,  p.  140. 

*  Report  of  the  Commission  on  Revenue  and  Taxation,  1910,  pp.  12-13. 

3  The   commission,   having    completed   the   work    for    which    it    was 
created,  was  reorganized  by  legislative  act  on  March  24,   1909.    The 
number  was  reduced  to  one  commissioner,  Senator  J.  B.  Curtin  and 
the  secretary  Professor  C.  C.  Plehn.    Its  work  was  to  show  the  effect 
of  the  proposed  amendment  in  operation. 

4  Special  Report  of  State  Board  of  Equalization  on  First  Effects  of 
Separation  (Sacramento,  1911),  p.  3- 


435]  SEPARATION  IN  CALIFORNIA 

tax  was  chosen  as  the  fairest  practicable  tax  which  could  be 
devised,  and  it  was  attempted  to  make  the  tax  for  each  class 
of  corporations  bear  the  same  relation  to  the  capital  value  of 
the  corporation  as  the  general  property  tax  bore  to  the  prop- 
erty on  which  it  was  levied.  The  method  chosen  for  deter- 
mining the  rate  of  taxation  on  gross  earnings  which  would 
be  the  equivalent  of  a  given  tax  rate  on  the  property  yielding 
the  gross  earnings  was  to 

(1)  ascertain  what  percentage  of  the  gross  earnings  is  net, 

(2)  ascertain  what  rate  of  interest  would  constitute  a  fair 
return  to  investors  in  the  securities  of  the  class  of  public- 
service  corporations  under  consideration,  then  (3)  divide  the 
percentage  of  net  earnings  by  the  rate  of  interest  and  multiply 
the  result  by  the  given  tax  rate  on  property.1 

This  is  expressed  by  the  algebraic  equation  t  =  J5Lxr.  Since 
it  was  held  that  within  each  class  of  public-service  cor- 
porations the  percentage  of  net  earnings  to  grass  was  about 
the  same,2  approximate  equality  would  be  attained  by  using 
the  same  percentage  for  all  of  the  corporations  in  each  class. 
It  was  estimated  that  the  average  rate  on  general  property 
would  be  about  one  per  cent  under  the  new  system,  and  this 
was  used  as  the  basis  for  determining  the  rates  on  gross 
earnings.3  Although  the  value  of  general  property  used  in 
making  the  comparisons  was  the  discounted  value  of  its  ex- 
pected future  earnings,  while  the  value  of  corporate  property 
was  determined  by  capitalizing  present  earnings,  the  valu- 
ation placed  on  corporations  was  not  in  most  cases  lower 
than  that  on  other  property,  even  though  the  rate  of  earn- 
ings usually  increases  as  corporations  develop.  This  is  due 

1  Report  of  the  Commission  on  Revenue  and  Taxation,  1906,  p.  94. 

2  This  has  been  demonstrated  by  the  stock  and  bond  valuations  made 
since.     (Stock  and  Bond  Valuation  of  Public  Utilities  in  California, 
1916.) 

8  Report  of  the  Commission  on  Revenue  and  Taxation,  1906,  pp.  99-100. 


I42   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [436 

to  the  fact  that  the  rate  of  interest  used  in  the  formula  was 
low  enough  to  include  discounted  future  value.1 

The  percentages  computed  for  the  different  classes  of 
public  utilities  on  their  gross  receipts  from  operation  were 
as  follows:  railroad  and  street  railways,  4  per  cent;  car 
companies,  3  per  cent;  express  companies,  2  per  cent; 
telegraph  and  telephone  companies.,  3.5  per  cent;  gas  and 
electric  companies,  4  per  cent.2  These  percentages  were 
changed  by  the  legislature  in  1913  following  a  general  rise 
in  the  rate  on  general  property  and  on  investigation  by  the 
state  board  of  equalization  which  revealed  certain  inequali- 
ties. A  further  change,  in  1915,  leaves  the  rates  for  the 
present  as  follows :  railroads  and  street  railways,  5.25  per 
cent;  car  companies,  3.95  per  cent;  express  companies,  1.6 
per  cent;  telegraph  and  telephone  companies,  4.5  per  cent; 
gas  and  electric  companies.  5.25  per  cent.3  These  taxes  are 
in  lieu  of  all  other  taxes,  except  local  taxes  on  non-operative 
property.4 

Every  insurance  company  doing  business  in  the  state  was 
taxed,  in  1910,  1.5  per  cent  upon  the  amount  of  gross  prem- 
iums and  reinsurance  in  companies  authorized  to  do  business 
within  the  state.  This  rate  was  made  2  per  cent  in  1915. 
This  is  in  lieu  of  all  other  taxes  except  taxes  on  real  estate, 
the  amount  of  which  is  to  be  deducted  from  state  taxes. 
The  retaliatory  clause  is  retained. 

1  According  to  the  statement  of  Professor  Plehn. 

z  Report  of  the  Commission  on  Revenue  and  Taxation,  1910,  p.  14. 

8 Report  of  the  State  Board  of  Equalisation  for  1915-1916  (Sacra- 
mento, 1916),  p.  23. 

4Public  utilities  under  construction  are  classed  as  non-operative  prop- 
erty until  the  state  board  of  equalization  shall  determine  that  they  are 
"  rendering  a  substantial  public  service  within  the  state."  Operative 
property  is  defined  as  "  any  .  .  .  property  .  .  .  that  may  be  reasonably 
necessary  for  use  by  said  (public  service)  companies  exclusively  in  the 
operation  or  conduct  of  the  particular  kinds  of  business  enumerated  in 
Section  2  of  this  act,"  i.  e.,  when  performing  a  public  service. 


437]  SEPARATION  IN  CALIFORNIA 

All  incorporated  banks  are  taxed  1.2  per  cent *  (1915)  on 
the  amount  of  stock  paid  in,  plus  its  pro  rata  of  accumulated 
surplus  and  undivided  profits.  The  shares  of  stock  are  as- 
sessed and  taxed  to  the  owners  at  the  place  where  the  bank 
is  located,  and  the  bank  is  held  liable  to  the  state  for  the  tax, 
and  may  assume  it.  This  tax  is  in  lieu  of  all  other  taxes  ex- 
cept local  taxes  on  real  estate.  The  value,  as  assessed  by  the 
county,  of  any  real  estate,  other  than  mortgage  interests 
therein,  which  is  taxed  for  county  purposes,  is  deducted  from 
the  capital  value  of  the  stock  assessed  for  the  state  tax. 

All  franchises,2  other  than  those  expressly  provided  for, 
are  taxed  1.2  per  cent  on  their  actual  cash  value.3  This  value 
is  determined  by  subtracting  from  the  total  market  value  of 
all  outstanding  securities  the  assessed  value  of  tangible  prop- 
erty, but  discretion  is  exercised  in  arriving  at  the  assessable 
value. 

Should  the  revenues  from  these  corporation  taxes,  to- 
gether with  the  revenues  from  sources  retained  from  the  old 
system,  prove  insufficient,  a  state  tax  may  be  levied  on  all 
property,  including  that  subject  to  the  state  corporation 
taxes,  in  order  to  meet  the  deficiency.4 

1  This  was  made  0.6  per  cent  in  the  amendment  as  first  approved  by 
the  senate,  March,  1909,  but  was  raised  to  one  per  cent  shortly  before  the 
amendment  was  submitted  to  the  people  in  November   1910.      (Con- 
ference, 1911,  p.  123.) 

2  This  includes  the  rights  "  to  be  "  and  "  to  do  "  and  special  privileges. 
a  The  statutory  provision,  sec.  5,  approved  Feb.  3,  1913,  states  that 

"  due  deduction  for  good  will  shall  be  made."  No  provision  for  such 
deduction  is,  however,  made,  and  it  has  been  held  (by  Judge  Sturtevant 
of  the  Superior  Court  of  San  Francisco)  that  the  legislature  exceeded 
its  powers  in  stating  that  such  deductions  should  be  made,  since  "  good 
will"  is  included  in  the  value  of  the  franchise.  Since,  ho^|ev%r^the 
value  of  the  franchise  is  taken  as  only  fifteen  per  cent  of  its»true 
value,  due  deductions  are  in  fact  made.  *** 

4  This  and  the  two  provisions  following  were  added  to  the  amendment 
in  1910  in  order  to  get  sufficient  support  to  get  it  ratified.  (Conference, 
1912,  p.  70  et  seq.  * 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [438 

All  public  utilities,  insurance  companies  and  franchises  are 
subject  to  taxation  to  pay  the  interest  and  principal  on  the 
bonded  indebtedness  of  local  divisions  incurred  before  the 
amendment  went  into  effect ;  the  amount  thus  levied  is  to  be 
deducted  from  total  state  taxes. 

Until  1918  the  state  is  to  reimburse  all  counties  which  sus- 
tain loss  of  revenue  by  the  withdrawal  of  railroad  property 
from  county  taxation,  in  order  that  the  counties  may  have 
time  to  adjust  themselves  to  the  new  system.1 

The  provisions  of  the  amendment  are  made  self-execut- 
ing; the  rates  of  taxation  can  be  changed  only  by  a  two- 
thirds  vote  of  the  legislature;  there  may  be  no  proceedings 
to  prevent  the  collection  of  taxes,  but,  once  paid,  action  may, 
be  taken  to  recover  those  illegally  collected.  By  statutory 
enactment  in  1911  and  1912  the  state  board  of  equalization 
was  invested  with  ample  powers  for  obtaining  the  necessary 
information  and  proper  punishments  were  provided  for  fail- 
ure to  comply  with  the  law.  Consequently  no  difficulties 
were  experienced  in  enforcing  it. 

Since  the  general  property  tax  was  the  only  tax  for  state 
purposes  abolished  by  the  new  system,  receipts  from  fees, 
poll  taxes,  inheritance  taxes,  the  corporation  license  tax,  and 
revenues  from  state  property  and  institutions  remained  as 
before.  The  retention  of  the  corporation  license  tax  to- 
gether with  the  new  corporation  taxes  was  held  to  result 
in  double  taxation  and  by  the  decision  of  H.  K.  Mulford 
Company  vs.  Curry,  Secretary  of  State  (163  Cal.  276), 
foreign  corporations  were  exempted  from  its  provisions, 
since  the  constitution  provides  that  foreign  corporation's 

1  Owing  to  the  great  difficulty  of  determining  the  actual  net  loss  of 
each  county,  it  was  found  expedient '( 191 1 )  for  the  legislature  to  pro- 
vide for  reimbursement  by  the  payment  of  flat  sums  to  the  losing 
counties.  The  counties  in  turn  reimburse  those  road'  and  school  dis- 
tricts which  lose.  (Biennial  Report  of  the  State  Controller,  1912,  p.  21.) 


439]  SEPARATION  IN  CALIFORNIA 

shall  not  do  business  on  more  favorable  terms  than  domestic. 
The  tax  was  repealed  in  1913  but  reenacted  in  1915,  fol- 
lowing a  reversal  of  the  decision  in  the  Mulford  case  (Albert 
Pick  Co.  vs.  Jordan,  Secretary  of  State).  The  poll  tax  was 
repealed  in  1914. 

4.    ADMINISTRATION   OF  THE  NEW  LAW 

After  a  trial  of  two  years  the  administrative  officials  pro- 
nounced the  new  system  practicable,1  and  there  has  appar- 
ently been  no  change  of  opinion  since.  The  work  of  assess- 
ment for  state  taxes  proved  at  first  to  be  very  heavy,  and 
the  state  board  of  equalization  was  relieved  of  none  of  its 
former  duties,  except  a  certain  amount  of  equalization  of 
county  assessments,  for.it  had  to  continue  its  regular  assess- 
ment work  for  the  Panama-Pacific  Exposition  tax  and  the 
bond  redemption  taxes.  Because  of  the  pressure -of  work 
it  was  found  necessary  to  leave  assessments  for  bond  re- 
funds to  local  assessors,  subject  to  state  supervision.2 

Although  its  duties  were  for  a  time  exacting,  the  board 
met  with  but  few  difficulties  in  the  new  work.  The  -tax  on 
gross  receipts  was  found  easy  to  administer,  and  the  public 
service  corporations  cooperated  willingly  in  giving  the  neces- 
sary information.  Investigation  of  their  sworn  reports 
resulted  in  but  few  corrections,  and  these  were  such  that  the 
amount  of  taxes  due  to  the  state  was  slightly  reduced.3* 

Some  technical  difficulties  arose  in  assessing  banks,  due 
to  the  custom  of  keeping  the  books  in  such  a  way  as  not  to 
make  too  favorable  a  showing  (this  being  "in  the  interest  of 
sound  banking) .  It  was  also  found  difficult  to  get  a  cor- 
rect statement  of  undivided  profits,  some  of  which  are 
carried  as  interest,  exchange,  collection  and  dividends  un- 

1  Conference,  1912,  p.  170. 

•  Report  of  Controller,  1912,  pp.  28-29. 

3  Conference,  1911,  p.  125. 


I46   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [440 

paid.  There  was  a  little  trouble  from  the  undervaluation 
of  assets,  this  being  good  business  policy,  but  in  the  end 
satisfactory  results  were  obtained.1 

Considerable  difficulty  was  met  at  first  in  determining 
franchise  values.  The  amendment  states  that  franchises  are 
to  be  assessed  at  their  actual  cash  value,  in  the  manner  to  be 
provided  by  law.  The  legislature  did  not  prescribe  the 
method  of  assessment  but  left  it  to  the  discretion  of  the 
state  board  of  equalization  whose  members  were  forced  to 
determine,  as  best  they  could  within  four  months,  the  value 
of  about  twenty  thousand  franchises. 

The  greatest  difficulties  in  administration  are  due  to  the 
compromises  made  with  the  local  divisions,  viz.,  railroad 
reimbursements  and  bond  refunds,  which  the  commission 
resorted  to  in  order  to  have  the  amendment  ratified  in  1910. 
The  Panama-Pacific  Exposition  tax  also  complicated  mat- 
ters for  a  time. 

The  net  loss  in  county  revenues  due  to  the  withdrawal  of 
railroad  property  from  county  taxation  is  assumed  to  be  the 
amount  which  the  county  would  have  obtained  from  the 
taxation  of  railroads  under  the  old  system,  less  the  amount 
the  county  would  have  had  to  pay  to  the  state  under  the 
ad  valorem  tax.  To  ascertain  this  amount  would  neces- 
sitate computing  both  the  constructive  state  rate  on  prop- 
erty and  the  constructive  county  tax  rate  on  railroads  as 
they  would  have  been  under  the  former  system.  This  is 
not  only  difficult  to  accomplish  but  also  inequitable,  owing 
to  the  changes  in  the  proportion  of  assessed  to  real  values. 
Consequently,  although  the  original  intention  was  to  as- 
certain these  rates,  it  had  to  be  abandoned,  and  a  statute  was 
passed  in  1911  providing  for  the  payment  of  flat  sums  to 
the  counties  originally  sustaining  a  net  loss  of  revenue.* 

1  Conference,  1911,  p.  131.          2  Report  of  Controller,  1912,  pp.  20-21. 


441]  SEPARATION  IN  CALIFORNIA 

This  occasioned  dissatisfaction  on  the  part  of  some  of  the 
counties,  which  maintained  that  their  reimbursement  did 
not  cover  their  loss.  However,  in  1912  some  of  the  counties 
received  by  this  method  more  than  they  would  have  received 
had  the  original  method  been  adhered  to,  and  less  objection 
was  made.  Complaints  as  to  the  injustice  of  this  reimburse- 
ment were  also  received  from  counties  sustaining  no  loss 
from  the  withdrawal  of  railroad  property  from  county  taxa- 
tion but  suffering  from  the  withdrawal  of  other  corporate 
property  such  as  power  plants. 

The  bond  refund  payments x  have  been  made  by  the 
appropriation  of  fixed  sums  by  the  legislature,  to  be 
apportioned  among  the  counties  and  local  divisions  en- 
titled to  them,  the  state  having  previously  collected 
taxes  without  deductions  from  the  corporations.  In 
order  to  make  these  payments  it  was  necessary  to 
determine  the  exact  amount  of  bond  debts  existing  and 
outstanding  before  the  law  went  into  effect.2  Irrigation 
and  reclamation  districts  were  not  included  in  those  en- 
titled to  bond  refunds  since  theii  levies  are  held  by  the1 
attorney  general  to  constitute  special  assessments  rather 
than  taxes.  They  are  therefore  entitled  to  assess  the  prop- 
erty of  withdrawn  corporations,  and  to  collect  such  as- 
sessments regardless  of  state  taxes  on  these  corporations. 
The  claims  originally  presented  by  the  local  districts  ex- 
ceeded those  eventually  paid,  but  the  final  adjustment  was 
in  most  cases  accepted  as  satisfactory. 

The  counties  have  increased  the  amount  due  from  the 
state  in  bond  refunds  in  two  ways :  by  making  the  interest 
and  principal  of  the  bonds  of  public  utilities  subject  to  pay- 
ment by  taxes,  where  they  were  formerly  paid  out  of  the 
earnings  of  the  utilities  for  which  the  bonds  were  issued; 
and  by  raising  the  assessment  of  operative  property.3  As- 

1  Supra,  p.  144.  .    2  First  Effects  of  Separation,  p.  28. 

3  Report  of  Controller,  1912,  p.  30. 


I48   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [442 

sessments  for  the  payment  of  bond  refunds  are  made  by  the 
local  assessors,  subject  to  state  supervision.  It  is  to  the  in- 
terest of  local  districts  to  assess  operative  property  at  a 
higher  rate  than  non-operative,  since  this  will  cause  the 
state  to  pay  a  relatively  greater  amount  of  the  bond  interest 
and  principal  than  the  locality;  and  the  corporations,  being 
taxed  by  the  state  on  gross  earnings,  are  not  interested  in 
keeping  down  the  valuations.  The  result  has  been  that,  in 
spite  of  state  supervision,  there  has  been  a  disproportionate 
increase  in  operative  property  assessments.  The  increase  in 
the  fiscal  year  1911-12  was,  for  operative  property,  27.4 
per  cent, — for  non-operative,  only  11.2  per  cent.  To  take 
an  extreme  case  one  city  increased  its  operative  property 
valuation  67  per  cent  in  that  year  and  its  non-operative 
only  10  per  cent.  In  another  instance  the  operative  roll  was 
increased  45  per  cent  while  there  was  an  actual  de- 
crease in  the  non-operative  assessments.1  In  1914  the 
valuation  of  operative  property  had  increased  50  per  cent 
over  1911,  while  that  of  non-operative  property  had  in- 
creased less  than  23  per  cent.2  The  extension,  by  the 
auditors  and  clerks,  of  these  bond  taxes  against  the  personal 
property  of  banks,  which  is  exempt  under  the  amendment, 
also  was  a  cause  of  difficulty. 

The  Panama-Pacific  Exposition  tax  was  a  state  ad 
valorem  tax  on  all  property,  corporate  and  individual,  for 
the  purpose  of  raising  $5,000,000  for  the  Exposition.3  It 
was  temporary,  running  only  for  the  four  years  1911  to  1914 
inclusive,  and  amounted  to  less  than  five  cents  on  a  hundred 
dollars.  Consequently  it  did  not  seriously  interfere  with 
the  working  of  the  new  scheme.  But  it  necessitated  con- 
tinuing the  old  system  along  with  the  new,  and  to  a  limited 

1  Report  of  Controller,  1912,  pp.  258-261. 

2  Report  of  the  State  Board  of  Equalization  for  1913-1914,  p.  10. 
3 /&«/.,  1911-12,  p.  5. 


443]  SEPARATION  IN  CALIFORNIA 

extent  retarded  the  benefits  of  the  new  and  retained  the 
evils  of  the  old. 

5.    LITIGATION 

The  constitutionality  of  the  various  provisions  of  the 
amendment  has  been  thoroughly  tested.  A  series  of  actions 
has  been  brought  against  the  state,  beginning  in  1912,  by 
the  corporations  which  have  protested  the  payment  of  their 
taxes,  for  the  purpose  of  recovering  taxes  paid,  and  deter- 
mining the  validity  of  the  new  law.  The  cases  have  in- 
volved questions  of  double  taxation,  the  correct  interpreta- 
tion of  "  gross  receipts  from  operation  "  and  the  inclusion 
in  such  gross  receipts  of  specific  earnings,  the  validity  of 
such  a  tax  (the  claim  being  advanced  that  it  was  a  tax  on 
interstate  commerce),  the  proper  classification  of  property 
as  operative  and  non-operative,  and,  on  various  grounds, 
the  validity  of  the  state  assessment  o*f  corporate  franchises. 
Most  of  these  have  been  decided  in  favor  of  the  state,  and 
none  of  the  adverse  decisions  has  affected  the  operation  of 
the  law.1 

6.    SHIFTING  OF  THE  TAX  BURDEN 

The  aim  of  separation  was  so*  to  adjust  the  burden  of 
taxation  that  it  would  be  borne  equitably  by  all  property, 
O'f  whatever  kind  or  wherever  situated.  Before  separation, 
as  explained  above,  there  were  inequalities  between  different 
counties  and  between  different  kinds  of  property.  By  the 
removal  of  the  state  tax  on  general  property  it  was  hoped 
that  assessed  valuations;  would  approach  true  values,  and1 
that  all  property  within  each  local  division  would  be  as- 
sessed at  the  same  ratio.  The  tax  rate  would,  of  course, 
vary  somewhat  from  district  to  district,  but  since  the  taxes 
are  used  for  local  purposes  that  property  taxed  most  heavily 

1  Report  of  the  State  Board  of  Equalization,  1912,  pp.  12-14;   1914, 
pp.  20-21 ;  1916,  pp.  19-20. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [444 

would  benefit  the  most,  and  consequently  there  would  be 
no  injustice.  By  putting  the  taxation  of  corporations  into 
the  hands  of  the  state,  and  changing  the  method  of  levying 
taxes,  it  was  expected  that  the  greater  part  of  intangible 
property,  which  was  escaping  under  the  old  system,  would 
be  reached.1 

In  the  six  years  during  which  the  law  has  been  in  opera- 
tion there  has  been  a  decided  shifting  of  the  tax  burden. 
Just  how  far  this  shifting  has  gone,  and  to  what  extent  it 
has  equalized,  is  hard  to  discover;  but  the  state  board  of 
equalization  has  attempted  with  some  success  to  measure  it, 
and  the  results  obtained  show,  at  least  approximately,  the 
effect  of  the  new  law  on  property  taxed  locally,  and  on  the 
corporations  taxed  by  the  state. 

According  to  the  estimates  made  by  the  state  board  of 
equalization  the  ratio  of  the  assessed  to  the  real  value  of 
property  taxed  locally  varied  in  1912  from  24.8  per  cent 
(Butte  County)  to  70.2  per  cent  (Mariposa  County),  aver- 
aging 45.1  per  cent.2  A  more  recent  estimate  (1916)  by 
the  state  tax  commission  places  the  ratio  of  assessed  to  true 
value  at  43  per  cent.3  Whether  assessed  values  will  even- 
tually rise  to  approximate  the  true  value  of  property  is  still 
a  matter  for  debate.  Local  assessors  probably  held  back  at 
first,  partly  on  account  of  the  Panama-Pacific  Exposition 
tax,  and  partly  in  expectation  of  a  return  to  the  state  ad 
valorem  tax  in  case  of  insufficient  revenues.  The  possibility 
of  the  latter  may  still  be  influencing  their  action.  The  rise 

1  Report  of  the  Commission  on  Revenue  and   Taxation,   1906,  p.  87 
et  seq. 

2  Computed  from  data  in  the  Special  Report  of  the  State  Board  of 
Equalisation   on   the  Relative  Burden   of  State   and  Local   Taxes  of 
1912.     (1913),  p.  41. 

3 Report  of  the  State  Tax  Commission  of  California,  1917.     (Sacra- 
mento, 1917),  p.  15. 


445]  SEPARATION  IN  CALIFORNIA  j^j 

in  assessed  values,  of  twenty-three  per  cent  between  the 
years  1910-11  and  1912-13,  and  eleven  per  cent  between 
1912-13  and  1914-15,  and  again  between  1914-15  and  1916- 
i/,1  is  apparently  due  to  increases  in  the  actual  value  of 
assessable  property. 

The  average  tax  rate,  state  and  local,  on  the  assessed 
value  of  non-operative  property  was,  in  1915,  $2.27,  1914, 
$2.44,  and  in  1913,  $2.53,  as  compared  with  1911,  $2.40 
and  1906,  $i.82.2  The  average  rate  on  actual  value  was 
estimated  in  1915  to  be  $1.22  and  in  1913,  $1.14.* 

The  average  rate  for  municipalities  has  risen  as  follows : 

TABLE  X* 
MUNICIPAL  TAX  RATE 
z>^  ^  -  *,n  Rate  per  $100  assessed  value 

'ZZtSZ  "ttZSSr 

1910-11 $1.47  $1.47 

1911-12 1.69  1.51 

1912-13 1.58  1.37 

I9I3-M 1-75  M2 

1914-15 !-76  i-53 

In  spite  of  the  increased  local  rates,  due  to  the  increasing 
demand  for  revenue  and  to  the  withdrawal  of  operative 
property,  non-operative  property  is  taxed  less  under  separa- 
tion than  it  would  have  been  under  the  former  system. 

1  Computed  from  data  in  Reports  of  the  State  Board  of  Equalization. 

2  Computed)  from  data  in  Report  of  the  State  Controller. 

3 This  rate  is  the  ratio  of  total  taxes  (Panama-Pacific  Exposition 
tax  included)  to  the  appraised  value  of  property,  as  made  by  the  state 
board  (Reports  of  the  State  Board  of  Equalisation,  1914,  1916)  ;  which 
appraised  value  is,  as  nearly  as  could  be  ascertained,  equal  to  the  full 
cash  value  of  property.  It  was  estimated  before  separation  that  under 
the  new  law  this  rate  would  be  $1.00  per  $100  on  the  real  value  of  all 
property,  in  whatever  manner  or  by  whatever  agent  taxed. 

4  Estimated  from  data  in  Annual  Report  of  Financial  Transactions  of 
Municipalities  and  Counties  of  California,  1911-1915. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [446 

Assuming  that  the  same  amount  of  revenue  would  have 
been  collected  for  local  purposes  under  the  old  system,  had 
it  remained  in  use,  a  rate  of  $2.29  on  all  property  would 
have  resulted  in  the  same  revenue  as  was  raised  by  a  rate 
of  $2.53  in  1913.  Consequently  if  a  state  tax  of  thirty  cents 
per  $100  *  had  been  added  to  this  the  tax  rate  on  property 
would  have  been  $2.59,  or  six  cents  higher  than  it  actually 
was  in  1913.  Thus  while  the  burden  on  property  is  heavier 
than  it  was  before  separation,  it  is  not  as  heavy  as  it  would 
have  been  had  the  old  system  remained. 

Turning  to  the  burden  on  subjects  taxed  by  the  state,  it 
will  be  seen  that  a  decided  increase  has  been  realized. 
Through  the  method  oif  capitalizing  net  earnings  already 
explained  2  the  commission  computed  the  rate  of  taxation 
on  gross  earnings  which  would  equal,  according  to  its  esti- 
mates, one  per  cent  of  the  capital  value  of  the  different 
public  service  corporations.  Applying  the  same  method  in 

1911,  with  the  gross  and  net  receipts  for  that  year,  approx- 
imately the  same  results  were  obtained  except  for  express 
and  car  companies.     These  results  are  as  follows : 

TABLE  XIs 
RELATIONSHIP  or  NET  TO  GROSS  RECEIPTS  OF  CALIFORNIA  PUBLIC  UTILITIES, 

1906  AND  1911 
Class  of  Utilities  1906  Percentage          1911  Percentage 

Steam  and  Street  Railroads 36.00  36.86 

Gas  and  Electric 36.00  *  38.23 

Telegraph  and  Telephone 20.00  21.10 

Car  Companies  (Pullman)  36.00  l  14.55 

Express   15.00  8.64* 

1  (See  p.  153).  '(Seep.  153). 

Approximately  the  excess  of  the  state  tax  under  the  former  system 
over  the  Panama- Pacific  Exposition  tax  under  the  present  system. 
8  Supra,  p.  142  et  seq. 

3  Special  Report  on  the  Relative  Burden  of  State  and  Local  Revenues, 

1912,  pp.  16-17. 

4  Because  of  the  rapid  depreciation  peculiar  to  these  companies  the 
commission,  in  1906,  found  it  impossible,  or  at  least  impracticable,  to 


447]  SEPARATION  IN  CALIFORNIA 

In  the  cases  both  of  the  car  and  the  express  companies, 
the  percentages  recommended  by  the  commission,  four  to 
five  per  cent  in  the  first  case,  and  three  per  cent  in  the  second, 
were  reduced  by  the  legislature  to  three  and  two  per  cent 
respectively.  Thus  these  companies  have  not  been  unduly 
overburdened.3  But  the  ratio  of  net  to  gross  earnings  is 
found  to  vary  greatly  with  different  companies.  These 
variations  were  computed  in  1911  to  be  as  follows: 

TABLE  XII* 

RATIO  OF  NET  TO  GROSS  EARNINGS  OF  CERTAIN  PUBLIC  UTILITIES 
IN  CALIFORNIA 

Railroads  and  Street  Railways Deficit  to  62.0  per  cent 

Gas  and  Electric  Companies Deficit  to  75.5  per  cent 

Telegraph  and  Telephone  Companies 0.5     to  90.0  per  cent 

The  computations  for  express  and  car  companies  included 
in  each  case  only  a  single  company,  viz.,  Wells,  Fargo  and 
Company  and  the  Pullman  Company. 

compute  the  ratio  of  net  to  gross  receipts.  Instead  an  estimate  was 
made  of  the  value  of  the  property  by  ascertaining  the  cost  of  con- 
struction and  equipment.  It  was  assumed,  in  taking  this  "  book  value," 
that  should  it  be  higher  than  the  cost  of  reproduction,  the  difference 
would  be  more  than  made  up  by  the  value  of  the  franchise,  which  was 
not  included  in  the  cost  of  construction.  It  was  found  that  one  per 
cent  of  this  cost  was  about  the  same  as  five  per  cent  of  gross  earnings, 
and  consequently  a  rate  of  four  to  five  per  cent  on  gross  earnings  was 
recommended  by  the  commission. 

1  The  inaccurate  computation  of  the  ratio  of  net  to  gross  receipts, 
1906,  was  due  to  insufficient  information.  The  Pullman  Company  did 
not  in  that  year  furnish  the  board  with  a  statement  of  earnings  and 
this  estimate  was  made  from  what  data  could  be  obtained  elsewhere. 

s  This  is  for  Wells,  Fargo  &  Company  only.  It  includes  what  is  paid 
to  the  railroads  for  "express  privileges."  Were  these  payments  ex- 
cluded from  the  estimates  of  gross  receipts  (the  law  forbids  their 
exclusion)  fifteen  per  cent  would  still  be  the  ratio  of  net  to  gross 
receipts. 

*Cf.  present  rates,  supra,  p.  144. 

4  Special  Report  on  the  Relative  Burden  of  State  and  Local  Revenues. 
1912,  passim. 


! -4  SEPARATION  OF  STATE  AXD  LOCAL  REVENUES    [448 

The  state  board  of  equalization,  in  order  to  test  further 
the  burden  of  the  new  taxes,  made  valuations  of  the  com- 
panies by  the  "  stock  and  bond  "  method.  This  method 
consists  in  ascertaining  the  market  value  of  stocks  and 
bonds,  and  multiplying  the  number  outstanding  by  their 
respective  prices.  The  ratios  of  taxes  to  valuations  ob- 
tained by  this  method  are  as  follov. 

TABLE  xm1 

RATEOT  TAXATKNI  rexfioo  ACTUAL  VALUE  ro*  Pcvuc  UTILITIXS,  CAIIFOUOA. 
(GoTEKDiG  OHLT  THOSE  COMPANIES  VALUED),  1912-1916 

1912  '9*4  1916 

Raflroads  aad  Street  Raflvajt 1^91  $1.10  $1.31 

Gas  aad  Electric. .75  :S  ijo8 

Telegraph  aad  Telephone J)\  1.12  1.40 

Car  Companies. .88  1.54  1.30 

The  low  rate  obtained  for  gas  and  electric  companies 
(which  have  the  same  ratio  of  net  to  gross  receipts 
as  railroads)  is  explained  by  the  fact  that  many  of  them 
are  just  developing,  and  are  not  yet  operating  to  full  capac- 
ity. Consequently  their  present  earnings  are  small  as  com- 
pared with  their  expected  future  earnings. 

In  the  comparison  of  individual  companies  within  the 
same  class,  wide  differences  in  the  tax  burden  are  found. 
The  rate  obtained  by  this  method  varied  for  railroad  com- 
panies from  .34  per  cent  to  1.66  per  cent;  *  in  other  words, 
some  roads  were  paying  five  times  as  much  in  taxes  on 
their  estimated  stock  and  bond  valuation  as  other  roads. 
Considering  only  those  roads  valued  at  over  $5,000.000, 
the  difference  was  less,  being  from  .42  to  1.07  per  cent 

The  variation  in  gas  and  electric  companies  was  from  .31 
to  441  per  cent;  i.  e.9  some  companies  were  paying  $1.00 

*  Reports  of  State  Board  of  Equalization,  1912-1916. 
* Special  Report  on  the  Relative  Burden  of  State  and  Local  Revenues, 
1912,  p.  19  et  seq. 


449]  SEPARATION  IN  CALIFORNIA 

in  taxes  where  others  were  paying  $14.28.  When  only 
those  companies  of  $5,000.000  capitalization  are  considered, 
the  variation  is  from  .31  to  1.18  per  cent 

Telegraph  and  telephone  companies  were  paying  any- 
where from  63  cents  on  $100  to  $2.50;  or,  excluding  the 
companies  under  $100,000  capitalization,  from  71  cents  to 

$1-57- 

In  1916  the  discrepancies  appear  to  be  much  smaller. 
owing  in  part  to  more  accurate  accounting  in  1916,  in  part 
to  some  inflation  of  values  in  1912.*  But  variations  are 
still  large.  The  burdens  are  resting  by  no  means  equally  on 
the  different  classes  of  corporations  or  on  die  different  cor- 
porations of  the  same  class.  This  is,  of  course,  assuming 
that  "  equality  "  means  equal  taxes  for  equal  capital  value. 
If  gross  earnings  may  be  accepted  as  the  criterion,  then 
equality  has  been  attained  There  are  no  data  to  show 
equality  as  measured  by  net  earnings,,  which  is  the  more 
satisfactory  standard. 

In  comparing  the  present  burden  on  public  utilities  with 
that  before  1910,  by  means  of  the  rate  on  gross  receipts,  a 
decided  increase  is  shown  : 

TABLE  xnr« 

ESTIMATED  RATE  oat  C-*nvi  Par«p»i<>  OF  PUBLIC  UTILITIES,  1905  ASO> 

ACTUAL  RATE,  1915 
dma  foof  1915 


Street  Raflwars  ........................  AJOI 

Express  ...............................  0.514 

TetepboBe.    ...........................  **s                         +90 

Telegraph  .............................  ij66                          _  -  1 

Light,  Heat  and  Pawn  ..................  jjoj                           :_: 

Water  ................................ 


*  PfeKm,  "Stock  and  Bond  Vataatiao  of  Pabfic  Utifitics  in  Cafi- 
fornia.1*  Report  of  Staff  Tax  Comrntissiom,  19161,  p.  iz. 

^Report  of  Commission  on  Rmmme  and  Taxation,  19061  p.  6B; 
Report  of  State  Board  of  EguaSaatm,  19161  p.  33. 


156   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [450 

The  taxes  paid  by  the  railroads  for  state  and  county  pur- 
poses on  the  assessments  of  the  board  of  equalization  were, 
in  1910-11,  $2,163,226,  including  rolling  stock.  The  re- 
maining taxes,  paid  on  operative  property  as  assessed  by 
local  assessors,  amounted  probably  to  between  six  and  seven 
thousand  dollars.  Thus  the  total  of  taxes  paid  on  operative 
property  was  nearly  a  million  less  in  1910-11  than  in  1911- 
12,  when  $3,736,000  were  paid  into  the  state.1 

The  larger  gas  and  electric  companies  paid,  in  1911-12, 
about  sixty  per  cent  more  in  taxes  than  they  had  been 
paying;  telephone  companies  had  their  taxes  increased  by 
one  hundred  per  cent,  and  telegraph  companies  by  two 
hundred  per  cent ;  car  companies  were  increased  by  fifty  per 
cent.  The  greatest  increase  was  for  express  companies 
whose  taxes  rose  by  five  hundred  per  cent.2 

Bank  and  franchise  taxes  being  ad  valorem,  it  was  un- 
necessary to  make  any  special  computations.  Their  taxes 
equaled  one  per  cent  of  assessed  value  in  1911  and  1912, 
and  the  assessed  value  approximates  true  value  as  nearly  as 
it  can  be  estimated  by  the  board.  In  1905  state  commercial 
banks  had  been  paying  eight-tenths  of  one  per  cent  on  their 
capital,  savings  banks  1.25  per  cent,  and  national  banks 
two-tenths  of  one  per  cent. 3  Bank  real  estate  is  assessed 
locally  at  from  twenty  to  sixty-five  per  cent,  averaging 
about  forty  per  cent  of  its  true  value.4 

Corporations  were  assessed  on  franchises  in  1911  at 
$167,500,000  and  in  1913,  $184,994,300,  as  compared  with 
$29,190,000  under  local  assessment  in  1910  and  $20,142,- 
ooo  in  1906.  The  taxes  paid  on  franchises  were  $1,619,- 

1  Report  of  the  Controller,  1912,  pp.  10-11. 
*  Conference,  1911,  p.  127  et  seq. 
3  Cf.  supra,  pp.  133-134- 

4 Compare  with  the  rate  of  assessed  to  real  value  of  45.1  per  cent  on 
other  property.    Special  Report  on  State  and  Loral  Taxes,  1912,  p.  14. 


451]  SEPARATION  IN  CALIFORNIA 

600  in  1911-12  and  $1,557,500  in  1913-14,  as  compared 
with  $700,600  in  1910-11  and  $366,600  in  1906-07. l  Thus 
under  the  new  system  there  are  being  taxed  between  $100,- 
000,000  and  $200,000,000  of  franchise  value  which  escaped 
entirely  under  the  old  system.  Of  the  $29,000,000  assessed 
in  1910,  a  large  part  was  on  public  service  corporations 
now  reached  through  the  gross  earnings  tax.  Therefore 
the  amount  of  taxes  obtained  from  those  corporations  pay- 
ing over  $1,500,000  in  1911  and  1912  was  considerably 
less  than  $700,600  in  1910. 

The  tax  on  insurance  companies  produced  $520,200  in 
1911-12,  and  $760,300  in  1913-14.  In  1905  only  $48,000 
were  obtained  from  this  source. 

To  sum  up,  the  rate  levied  on  property  taxed  locally, 
while  it  has  advanced  slightly  since  1910,  has  not  advanced 
to  the  point  which  it  would  have  reached  under  the  old  sys- 
tem. The  burden  has  been  shifted  in  some  measure  from 
such  property  to  corporate  property,  which  is  now  paying 
this  as  well  as  its  share  of  the  normal  increase  due  to'  in- 
creased governmental  expenditures.  In  consequence,  be- 
tween corporate  property  and  the  property  of  individuals 
some  appreciable  equalization  has  been  realized.  But  among  ! 
the  various  kinds  of  property  under  the  general  property 
tax,  among  individual  properties  of  the  same  kind  in  the 
same  county,  and  among  the  properties  of  different  classes 
of  corporations  and  of  different  corporations  of  the  same 
class,  there  are  still  serious  inequalities — not  so  great,  to  be 
sure,  as  before  1910,  but  still  far  from  even  approximating 
equality. 

7.    REVENUES  AND  ASSESSMENTS  UNDER  THE  NEW  SYSTEM 

Along  with  this  shifting  of  the  burden  has  gone  a  large 
lCf.  data  in  Reports  of  State  Controller. 


158   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [453 

increase  in  revenues  in  all  of  the  divisions  of  government. 
It  was  anticipated  that  the  cities  would  be  the  greatest 
losers  from  the  change,1  since  as  cities  they  gained  nothing 
through  the  removal  o>f  the  state  tax  (the  tax  for  state 
purposes  having  been  collected  through  the  counties),  while 
through  the  withdrawal  of  operative  property,  three  fourths 
of  which  (74.4  per  cent  1912)  is  found  within  the  cities, 
they  would  lose  heavily.  As  a  result  of  this  it  was  feared 
that,  since  the  tax  rate  is  limited  by  their  charters,  their 
revenues  would  be  greatly  reduced  and  serious  consequences 
would  ensue.  These  fears  have  not  been  realized. 

The  total  value  of  operative  property  withdrawn  from 
municipal  taxation  was,  in  1912-13,  $245,000,000.  This  is 
thirteen  per  cent  of  the  total  value  of  municipal  property,2 
and  it  included  seventy- four  per  cent  of  all  of  the  operative 
property  in  the  state.  Some  of  the  towns  contained  no 
operative  property,  but  in  several  the  amount  withdrawn 
was  over  twenty  per  cent.  In  San  Francisco  the  operative 
property  (equal  to  thirty-eight  per  cent  of  all  operative 
property)  amounted  to  fifteen  per  cent,  as  assessed  in  1912; 
in  Los  Angeles,  twenty-one  per  cent.s 

Following  the  withdrawal  of  operative  property  some 
increases  were  made  in  the  ratios  of  assessment.  Los  An- 
geles claimed  to  have  raised  her  ratio  of  valuation  about 
ten  per  cent  in  the  year  1911.*  The  ratio  has  been  raised  in 
Oakland  from  fifty  to  sixty  per  cent,  in  Pasadena  from  sixty 

1  Special  Report  on  First  Effects  of  Separation,  1911,  p.  21. 

'Computed  from  Financial  Transactions,  1912.  The  value  of  all 
operative  property  in  the  state  equaled  twelve  per  cent  of  the  total 
value  of  all  property.  (Report  of  the  Controller,  1912.) 

3  Report  of  the  State  Board  of  Equalization,  1912,  pp.  20-21. 

4  It  was  in  Los  Angeles  that  half  of  the  increase  in  city  assessment 
rolls   for  that  year  took  place.     Special  Report  on   First  Effects  of 
Separation,  1911,  p.  21. 


453]  SEPARATION  IN  CALIFORNIA 

to  sixty-seven,  and  in  Sacramento  from  sixty  to  sixty-eight.'1 
None  of  the  other  large  cities  has  raised  its  ratio,  although 
the  ratios  are  only  forty  to  fifty  per  cent  in  most  of  them. 
To  what  extent  smaller  cities  have  raised  their  ratios  no 
attempt  has  been  made  to  determine,  but  owing  to  the  limi- 
tation of  the  tax  rate  some  cities  have  probably  been  forced 
to  raise  their  valuations  in  order  to  obtain  sufficient  revenue 
after  the  withdrawal  of  operative  property. 

An  examination  of  the  fluctuations  of  the  city  tax  rates 
shows  no  abnormal  change.  There  are  more  increases  than 
decreases,  but  this  is  attributable  to  growing  bonded  indebt- 
edness and  broadening  departmental  activities,  a  natural 
result  of  the  growth  of  cities. 

No  difficulty  has  been  encountered  in  securing  sufficient 
revenue  for  municipal  purposes. 


TABLE  XVs 

MUNICIPAL  PROPERTY  TAX 

Percentage  of  Re 

Year         No. 

of  Cities 

Total  Receipts      Gentral^Property         «**£«* 

Tax 

1910-11  

133 

$46,134,517          £20,045,405                      43 

1911-12  

191 

46,777,804            21,476,153                      46 

1912-13.... 

218 

60,551,300            24,711,884                      48 

1913-14.... 

233 

66,830,330            29,714,855                      43 

1914-15.... 

240 

68,724,579            31,625,161                      46 

The  increase  in  municipal  taxes  shown  in  this  table  is 
due  in  some  measure  to  the  larger  number  of  cities  included 
in  the  estimate  each  year,  but  this  accounts  for  only  a  small 
part  of  the  growth,  since  the  towns  added  are  small.  Eighty 
per  cent  of  the  increase  in  revenue  in  1912  took  place  in  the 
fifteen  largest  cities. 

1  Census  Report,  Financial  Statistics  of  Cities,  1909,  p.  240  et  seq.; 
1915,  p.  318. 

2  Financial  Transactions,  1911-1915. 


!6o   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [544 

The  changed  system  does  not  seem  to  have  affected  the 
amount  of  city  revenues  in  any  way.  Receipts  from  the 
property  tax,  which  are  the  only  ones  which  might  be 
affected  by  separation,  have  remained  the  same  relatively  to 
the  receipts  from  other  sources,  as  shown  in  the  above  table. 
San  Francisco*  showed  a  net  gain  of  approximately  $300,- 
ooo  in  1911-12  and  $150,000  in  1912-13. l  Berkeley  alone 
of  the  larger  cities  obtained  less  revenue  from  the  general 
property  tax  the  first  years  after  separation. 

The  amount  of  bonded  debt  outstanding  in  the  munici- 
palities in  1911-12  was  $65,573,033.  The  bond  refunds 
paid  in  the  year  1911-12  to  the  municipalities  were  $421,- 
997,  over  $300,000  of  which  went  to  Los  Angeles  and  San 
Francisco.  In  1912-13  it  was  $507,330  and  in  1913-14, 
$517,599.  The  amounts  thus  received  have  increased  in- 
stead of  diminishing,  owing  to  the  increase  of  operative 
property  and  to  the  raising  of  the  ratio  of  assessed  value 
of  operative  property  above  that  of  non-operative  property 
(which  the  local  assessors  have  tended  to  do),  and  because 
the  interest  and  principal  on  bonded  indebtedness,  which 
were  formerly  paid  out  of  the  earnings  of  the  public  util- 
ities for  which  the  bonds  were  issued,  are  now  being  paid 
from  taxes.  *  However,  as  the  bonds  are  retired  the  amount 
will  gradually  decrease. 

The  cities,  then,  have  not  suffered  from  the  new  law  as 
was  feared.  While  the  actual  gains  and  losses  have  not 
been  computed,  it  is  evident  that,  with  perhaps  a  few  ex- 
ceptions, neither  has  been  very  great  San  Francisco,  with 
a  loss  of  fifteen  per  cent  of  her  assessment  roll,  and  Los  An- 
geles, with  a  loss  of  twenty-one  per  cent,  actually  gained 

1This  is  the  only  city  for  which  a  computation  of  net  gain  has  been 
made.  (Special  Report  on  State  and  Local  Taxes,  1912,  p.  23.  Special 
Report  on  the  Effects  of  Separation,  1911,  p.  17.) 

2  Report  of  Controller,  1916,  pp.  21-22. 


455]  SEPARATION  IN  CALIFORNIA 

through  the  change1 — gain  from  the  removal  of  the  state 
tax  exceeding  loss  through  the  withdrawal  of  operative 
property — and  many  other  cities  seem  to  have  done  likewise. 
Tax  rates  have  not  increased  abnormally,  nor  have  the 
revenues  decreased. 

Very  little  data  have  been  collected  concerning  the  effect 
on  the  different  districts,  but  the  state  board  of  equalization 
stated2  that  the  losses  were  small,  and  in  most  cases  cov- 
ered by  the  reimbursement  for  bond  taxes.  Provision  has 
been  made  for  reimbursement  by  the  counties  for  any  losses 
occasioned  by  the  withdrawal  o<f  operative  property  from 
local  taxation.  In  several  counties,  notably  Riverside,  San 
Bernardino  and  San  Diego,  many  of  the  school  districts 
were  laid  out  in  such  a  way  as  to  include  as  much  railroad 
property  as  possible.  These  consequently  lost  heavily.  In 
Riverside  County  one  school  district  lost  over  seventy  per 
cent  of  its  taxable  property.  In  San  Bernardino  County  six 
districts  lost  ninety  per  cent  or  more  of  taxable  property — 
one  district,  Bagdad,  losing  ninety-seven  per  cent.  This  is 
probably  the  most  extreme  case. 

The  counties  have  not  raised  their  assessed  valuations  to 
the  extent  anticipated.  The  total  assessment  roll  increased 
from  $2,370,000,000  in  1911  to  $2,919,000,000  in  1912, 
an  increase  of  twelve  per  cent,  as  compared  with  an  increase 
of  ten  per  cent  in  191 1.3  No  attempt  has  been  made  to  deter- 
mine how  much  of  this  is  due  to  a  rise  in  the  ratio  O'f  as- 
sessment, and  how  much  to  actual  increase  in  the  value  of 
property — but  the  estimate  made  in  1916  that  the  average 
ratio  of  assessed  to  real  value  was  43  per  cent  (earlier  esti- 

1  Special  Report  on  First  Effects  of  Separation,  1911,  pp.  17-20. 

2  Ibid.,  p.  18.  3  Reports  of  State  Controller. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [456 

mates  were  put  at  45  per  cent)  indicates  no  rise  from  this 
cause. 

The  tax  rates  as  a  whole  were  reduced,  and  this  in  spite 
of  the  fact  that  revenue  increased.  In  1912  forty-two 
counties  had  lower  inside  rates  and  thirty-seven  lower  out- 
side rates  than  in,  1910,  as  compared  with  eleven  with 
higher  inside  rates  and  twelve  with  higher  outside  rates. 
Five  inside  and  nine  outside  rates  remained  the  same.1 

The  increase  in  county  revenue  under  the  new  system 
has  been  very  decided.  As  shown  in  Table  XVI,  the  in- 

TABLE  XVI1 

INCREASE  IN  COUNTY  TAX  LEVY  (EXCLUSIVE  OF  RAILROAD  TAX) 
Year  Amount  Increase  over  Preceding  Year 

1906-07 $22,145,000  —  % 

1907-08 24,200,000  9 

1908-09 25,556,500  5 

1909-10 26,082,900  2 

I9IO-II 31,188,100  19 

I9II-I2 34,678,200  II 

1912-13 37,451,400  8 

1913-14 41,032,200  9 

1914-15 46,185,700  12 

I9'5-16 47,054,400  2 

crease  in  the  tax  levy  during  the  first  year  of  separation 
was  ten  per  cent  as  compared  with  only  two  per  cent  in  1909- 
10  over  1908-09.  The  large  increase  the  first  year  of  sep- 
aration (1910-11)  was  in  part  necessitated  by  the  loss  of 
revenue  from  railroads,  since  the  state  reimbursed  the 
counties  only  for  the  net  loss  from  the  withdrawal  of  rail- 
road property,  i.  e.,  the  difference  between  what  would 
have  been  obtained  from  the  railroads  under  the  old  system 

1  Special  Report  on  First  Effects  of  Separation,  1911,  pp.  14-15. 
*  Compiled  from  Reports  of  the  Controller,  1908-1916. 


457] 


SEPARATION  IN  CALIFORNIA 


and  what  is  gained    through  the  escape  from  the  state  tax 
on  property  under  the  new.1 

Including  the  railroad  tax  in  1909  and  1910,  the  results 
are  as  f  ollows  : 

TABLE  XVII2 

INCREASE  IN  COUNTY  TAX  LEVY  (INCLUDING  RAILROAD  TAX) 
Year  Amount  of  Levy  Increase  over  Year  Preceding 

1908-09  ............       $27,191,900  —  % 

1909-!°  ............         27,663,300  1.7 

1910-11  ............         31,188,100  12.7 

On  examining  the  counties  individually  it  appears  that 
the  effect  of  the  new  system  on  their  revenues  varies  widely. 
In  the  first  year  of  the  change  forty-four  counties  showed 
an  increase  in  county  revenue  and  fourteen  counties  showed 
a  decrease.  In  1912-13  nineteen  counties  showed  a  de- 
crease.3 Such  individual  variations  are  not  entirely  caused 
by  the  new  law,  though  probably  they  are  considerably  af- 
fected by  it. 

The  gain  to  the  counties,  estimated  by  subtracting  taxes 
lost  on  withdrawn  operative  property  from  taxes  gained 
through  the  removal  of  the  state  tax  on  non-operative  prop- 
erty, was  estimated  for  1911  at  over  $3,500,000.*  In  other 
words,  in  order  to  obtain  the  same  amount  of  revenue  for 
county  purposes  as  was  obtained  under  the  new  system 
(1911-12),  the  rate  on  general  property  would,  under  the 
old  system,  have  had  to  be  enough  higher  to  raise  $3,500,000 
more  of  revenue  from  non-operative  property  alone.  This 
is  not,  however,  clear  gain  to  the  counties,  for  they  are 

1  Property  must  therefore  be  taxed  up  to  the  amount  of  the  state  tax 
(as  it  would  have  been  under  the  old  system)  before  any  allowance  is 
made  for  loss  from  the  withdrawal  of  railroad  property. 

3  Compiled  from  Reports  of  the  Controller,  1908-1912. 

8  Report  of  the  State  Board  of  Equalisation,  1912,  p.  22. 

4  Special  Report  on  the  Effects  of  Separation,  1911,  p.  17. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [458 

required  under  the  law  to  reimburse  districts  and  cities  for 
losses  occasioned  by  the  withdrawal  of  operative  property. 

According  to  careful  estimates  made  by  the  state  board 
of  equalization  in  1911  *  it  was  computed  that  out  of  nearly 
$17,000,000  which  would  have  been  paid  by  the  counties 
to  the  state  under  the  old  system  in  the  two  years  1911  to 
1913,  a  sum  of  approximately  $10,000,000  was  clear  gain 
to  the  counties,  about  half  of  this  amount  being  used  in 
increased  county  expenditure,  and  the  other  half  being  kept 
by  the  county  taxpayers.  However,  fourteen  counties  suf- 
fered a  net  loss  aggregating  over  a  quarter  of  a  million. 
This  caused  considerable  readjustment,  and  therefore  some 
hardship,  but  the  counties  suffering  were  those  which  had 
long  been  profiting  from  unearned  railroad  taxes.  San 
Francisco  County,  though  containing  35  per  cent  of  the 
operative  property  of  the  state,  showed  a  net  saving  in 
1911-12. 

In  1912  the  net  saving  to  the  counties  was  a  little  under 
$3,500,000,  with  twelve  counties  showing  a  net  loss.2  For 
that  part  of  this  loss  which  is  due  to  the  withdrawal  of  rail- 
road property  from  local  taxation,  the  counties,  as  has  been 
mentioned,  are  reimbursed  by  the  state.  The  difficulties 
and  uncertainties  involved  in  computing  the  loss,3  largely 
owing  to  the  varying  rates  of  taxation  and  assessment  in 
the  different  counties,  led  to  the  payment  of  flat  appropria- 
tions, as  more  equitable  and  more  practicable.  The  legis- 
lature appropriated  $130,901  for  each  year  up  to  and  in- 
cluding the  year  1918,  to  be  used  for  this  purpose.  Seven 
counties  are  thus  reimbursed. 

1  Special  Report  on  the  Effects  of  Separation,  1911,  p.  8  et  seq. 

*  Report  of  State  Board  of  Equalisation,  1912,  p.  23. 

3  Such  a  computation  was  made  by  the  state  board  of  equalization  to 
show  the  effects  of  the  new  law,  but  was  not  used  as  the  basis  of 
reimbursements. 


459]  SEPARATION  IN  CALIFORNIA 

The  amount  appropriated  to  reimburse  the  localities  for 
bond  taxes  grew  from  $650,324  in  1911-12  to  $742,638  in 
1913-14.  In  the  last  two  years  the  amount  appropriated  has 
decreased  (to  $635,837  in  1915-16)  although  claims  have 
continued  to  grow.  It  has  been  the  city  more  than  the 
county  refunds  that  have  been  increased.1 

To  summarize :  The  counties,  as  a  whole,  show  a  decided 
increase  in  revenue,  greater  in  all  probability  than  would 
have  taken  place  under  the  old  system,  although  the  county 
revenues  were  rising  very  rapidly  before  1910.  The  tax 
rates  have  been  somewhat  lowered,  as  was  anticipated,  in 
spite  of  the  greater  revenues.  Assessed  valuations  in  the 
counties  have  risen  slightly,  but  not  to  the  extent  hoped  for. 
It  is,  however,  too  early  to  tell  how  far  these  may  be  affected 
by  the  new  law.  The  net  gain  to  the  counties,  due  entirely 
to  the  new  system,  was  very  large. 

The  state  revenues  have  been  most  affected  by  separation, 
since  the  property  tax,  the  largest  source  of  revenue  under 
the  old  system,  has  been  entirely  replaced  by  corporation 
taxes.  The  revenues  from  the  new  sources  have  exceeded 
in  very  instance  (except  car  companies)  the  estimates  made 
before  separation;  and  a  state  tax  on  general  property  has 
so  far  proved  unnecessary. 

TABLE  XVIII2 

AMOUNT  OF  CORPORATION  TAXES  LEVIED 

Corporation                             ign  igid 

Railroad  and  Street  Railways ..       $4,776,203  $6,862,112 

Gas  and  Electric 1,224,767  2,441,513 

Telegraph  and  Telephone 424,800  861,829 

Car 89,262  169,567 

Express 102,352  84,186 

Banks 1,638,646  2,235,924 

Insurance 520,215  1,065,272 

Franchises i  ,677,970  1 ,95  7,797 

Total 10,454,215  15,678,200 

1  Report  of  the  Controller,  1916,  p.  20. 

2  Report  of  the  State  Board  of  Equalisation,  1915-16,  p.  15. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [460 

TABLE  XIX1 

ACTUAL  REVENUES  FROM  CORPORATIONS  UNDER  THE  GENERAL  PROPERTY  TAX 

COMPARED  WITH  ESTIMATED  REVENUES  UNDER  SEPARATION,  1905 
Corporations                Actual  Revenues  Estimated  Revenues 

Railroads    $1,948,000  $3,800,000 

Telegraph  and  Telephone 143,900  210,000 

Express 14,800  120,000 

Gas  and  Electric 424,800  600,000 

Car 18,900  75,ooo 

Franchises 364,600  500,000 

Banks 721,400  1,500,000 

Total 3,635,600  6,805,000 

The  estimate  in  1909  of  the  total  amount  of  revenue  which 
would  have  been  derived  from  these  sources  in  that  year, 
had  the  new  system  been  in  operation  then,  was  $8,597,000." 

TABLE  XX3 

INCREASE  IN  REVENUES,  1910-1916 
Year  Receipts 

1910-11 $7,098,000 

1911-12 13,115,000 

1912-13 , 15,492,000 

I9I3-H 16,347,000 

1914-15 16,516,000 

1915-16 19,059,000 

The  increase  in  revenue  under  separation  has,  as  is  shown 
by  this  table,  been  very  decided.  It  was  for  a  time  seriously 
questioned  whether  the  increase  would  continue  as  rapidly, 
and  it  was  feared  that,  without  resort  to  the  state  ad  valorem 
tax  on  property,  it  would  be  impossible  to  keep  state  rev- 
enues abreast  of  state  expenditures.  But  the  state  has  ad- 
justed itself  to  the  new  system,  and  for  the  present  at  least 
revenues  are  sufficient,  although  there  is  no  assurance  that 
they  will  continue  to  be  so. 

1  Report  of  Commission  on  Revenue  and  Taxation,  1906,  passim. 

2  Ibid.,  1910,  p.  27.          3  Compiled  from  data  in  Controller's  Reports. 


461]  SEPARATION  IN  CALIFORNIA 

The  proportion  of  governmental  expenses  borne  by  the 
state  is  very  large  in  California.  Educational  expenditure 
in  1911-12  surpassed  that  of  any  other  state  except  New 
York,  regardless  of  population.1  The  common  schools  are 
supported  in  large  part  by  the  state.  The  University  of 
California,  one  of  the  largest  state  universities  in  the  United 
States,  is  likewise  a  heavy  expense,  as  also  are  the  normal 
schools,  and  high  schools.  Then  the  amount  spent  for  the 
support  of  charitable  institutions  is  greater  than  in  most 
states. 

The  increase  in  expenditure  promises  to  grow  very  rapidly. 
The  adoption  of  the  free  text-book  amendment  in  1912 
means  an  addition  of  approximately  $50,000  annually,  and 
appropriations  for  new  buildings  and  other  permanent  im- 
provements are  increasing  steadily.  In  1910  the  sum  of 
$29,500,000  for  bonds  was  authorized, — mostly  for  the  state 
highway.  In  1914  $15,800,000  more  were  voted.2  The 
situation  was  further  aggravated,  in  1914,  by  the  repeal  of 
the  poll  tax  and  corporation  license  tax,  which  yielded  ap- 
proximately three-quarters  of  a  million  each. 

To  prevent  a  deficit  the  rates  on  corporations  were  raised 
in  1913  and  again  in  1915,  following  careful  investigations 
which  showed  that  such  changes  would  not  raise  the  burden 
on  corporations  above  that  on  general  property  locally  taxed. 
In  addition  a  motor  vehicle  tax  was  enacted  in  1913,  which 
yields  over  $1,000,000  to  the  state, — as  well  as  an  equal 
amount  to  the  counties.  This  is  devoted  to  highway  ex- 
penses and  relieves  the  strain  on  the  general  fund  to  that 
extent.  The  corporation  license  tax  was  reenacted  in  1915 
following  a  reversal  of  the  decision  which  had  led  to  its 
repeal.  But  the  margin  between  revenues  and  expenditures 

1  Wealth,  Debt  and  Taxation,  1913. 

2  Report  of  the  Controller,  1914,  p.  24. 


!68   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [462 

is  small,  and  a  decided  increase  in  the  latter,  or  loss  of  some 
of  the  former,  will  necessitate  raising  the  corporation  tax 
rates,  providing  a  new  source  of  revenue,  or  resorting  to 
the  general  property  tax  for  state  use.  There  is  no  elastic 
source  of  revenue  and  the  danger  of  a  shortage  of  revenue 
is  imminent. 

8.    GROWTH  OF  EXPENDITURE 

The  rapid  increase  of  expenditure  which  has  absorbed 
the  growing  revenues  as  rapidly  as  they  have  been  realized 
has  not  been  abnormal.  Total  expenditures  of  cities  in- 
creased 32  per  cent  in  the  years  1910  to  1912  as  compared 
with  43  per  cent  in  the  years  1908-1910  before  separation. 
The  increase  in  1914  over  1912  was  nine  per  cent.1  This 
does  not  indicate  extravagance  and  any  wasteful  increase  in 
expenditure  on  the  part  of  local  officials  which  could  be  attri- 
buted to  separation  would  take  place  at  the  time  of  change. 
Municipal  debts  have  increased  rapidly,  but  the  movement 
toward  growth  of  bonded  indebtedness  started  before  separ- 
ation was  introduced.  Separation  would  serve  to  check 
rather  than  encourage  bond  issues  since  it  narrows  the  base 
on  which  the  debt  limits  are  estimated. 

There  has  been  no  apparent  effect  on  county  expenditures.2 
Total  expenditures  rose  9  per  cent  in  the  year  1912-13. 
Ordinary  expenditure  rose  1.8  per  cent.1  Such  increases  are 
not  abnormal.  County  debts,  like  those  of  municipalities, 
have  risen  rapidly,  but,  also  as  in  the  case  of  municipalities, 

1  Financial  Transactions,  1911-1915;  Report  of  the  Controller,  1910. 

2  The  state  tax  commission  (Report,  1917,  p.  12)  believes  that  the  local 
tax  rate  was  kept  unduly  high  at  the  time  of  separation.    While  this 
may  have  occurred  in  a  few  cases  the  fact  that  local  expenditures  as 
a  whole  have  not  increased  abnormally  does  not  seem  to  indicate  that 
many  of  the  localities  took  advantage  of  the  change. 

3  Financial  Transactions,  1913. 


463]  SEPARATION  IN  CALIFORNIA  ^9 

the  movement  did  not  arise  out  of  separation.  Whether 
extravagant  or  not  such  debts  if  affected  at  all  by  separation 
will  be  checked,  for  the  entire  burden  is  thrown  on  the 
property  of  individuals. 

TABLE  XXI1 
INCREASE  OF  BONDED  INDEBTEDNESS  OF  CITIES  AND  COUNTIES 

Year  Cities  Increase  Counties  Increase 

19" #65,573,033  ••  #40,956»959 

1912 83,297,511  27^  52,846,981  32$ 

1913 100,387,559  10  69,195,417  31 

I9H 106,924,759                  6  80,202,325  16 

1915 129,059,913  18  92,466,091  15 

It  is  still,  perhaps,  too  early  to  tell  whether  or  not  separa- 
tion encourages  extravagance  in  state  expenditure,  where 
waste  is  more  likely  to  creep  in  under  the  new  system. 
State  expenditure  has  risen  rapidly,  but  not  more  rapidly 
than  that  of  counties  and  municipalities,  the  burden  of  which 
falls  directly  on  the  people ;  and  apparently  not  more  rapidly 
than  state  expenditure  in  other  states  where  separation  has 
not  been  adopted. 

The  state  debt  has  increased  greatly.  In  1912,  for  the 
first  time,  it  went  above  the  maximum  of  $5,000,000  reached 
in  1867.  Three  years  later  (1915)  it  had  increased  more 
than  five  fold.  Highways  and  public  buildings  are  the  prin- 
cipal causes  of  this  debt, — and  since  at  present  the  people 
apparently  have  more  control  over  the  legislature  than  the 
corporations  it  may  very  well  be  that  the  new  system  has 
encouraged  such  expenditures.  The  possibility  of  a  return 
to  the  direct  tax  might  retard  them,  although  it  probably 
has  little  weight.  But  granting  that  separation  is  the  cause 
of  these  expenditures  it  still  remains  to  be  proved  that  they 
are  unwise.  Unless  the  benefits  accruing  are  procured  at 

1  Financial  Transactions,  1913,  1915. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [464 

the  cost  of  checking  production — and  corporations  do  not 
seem  to  be  overburdened — they  are  probably  advantageous. 

9.    ADMINISTRATIVE  CHANGES 

The  effect  of  separation  on  the  centralization  of  admin- 
istration has  been  much  the  same  here  as  elsewhere.  Separ- 
ation, while  bringing  intangible  property  and  that  tangible 
property  most  difficult  to  assess,  viz.,  the  operative  property 
of  corporations,  under  state  control,  has  tended  to  decen- 
tralize the  administration  of  the  local  general  property  tax. 
The  state  board  of  equalization  has  not  been  deprived  of  its 
power  of  equalizing  county  assessments  but  in  the  absence 
of  a  state  direct  tax  it  has  not  seen  fit  to  exercise  it.  Since 
the  board  never  had  the  power  of  equalizing  individual  as- 
sessments this  is  not  a  serious  loss.  The  inequalities  be- 
tween counties  were  never  the  most  flagrant  inequalities, 
and  with  the  removal  of  the  state  tax  they  are  of  even  less 
consequence.  The  county  assessors  have  a  larger  field  for 
their  activities  than  local  assessors  in  most  states,  and  the 
position  is  of  sufficient  importance  to  get  efficient  officers. 
But  as  long  as  local  election  is  adhered  to  a  large  percentage 
of  untrained  officials  will  hold  the  position  and  personal  in- 
terest and  local  pressure  will  prevent  unbiased  and  accurate 
assessments.  Little  equality  can  be  hoped  for  under  the 
present  system.  There  has  been  some  agitation  for  state- 
appointed  assessors  but  the  only  action  which  has  yet  been 
taken  is  to  permit  the  county  boards  of  supervisors  to  ap- 
point assistant  assessors  to  aid  the  elected  officials.  As  far 
as  the  general  property  tax  is  concerned  there  has  been  no 
gain,  and  some  slight  loss,  in  state  control;  but  considering 
the  fiscal  system  as  a  whole  there  is  a  marked  advance  in 
centralization. 


465]  SEPARATION  IN  CALIFORNIA 

IO.    OUTLOOK 

This  "  revolutionary  tax  measure  "  has  now  been  in  force 
nearly  six  years,  and  none  of  the  dangers  prophesied  has  as 
yet  developed.  It  has  withstood  the  attacks  made  through 
the  courts ;  the  administration  of  the  law,  with  the  exceptions 
of  the  difficulties  caused  by  the  bond  refunds  and  railroad 
reimbursements,  and  the  complications  resulting  from  the 
Panama- Pacific  Exposition  tax,  has  proved  comparatively 
simple ;  revenues  have  been  decidedly  increased. 

The  ratio  of  assessed  to  true  value  has  not  risen  as  much 
as  was  hoped  for  by  the  proponents  of  the  measure.  With 
the  removal  of  the  Panama- Pacific  Exposition  tax  and  with 
the  adjustment  of  local  tax  systems  to  the  new  system  as- 
sessed valuations  may  rise  more  rapidly,  until  they  approach 
true  values,  although  with  local  election  of  assessors  it 
seems  unlikely.  But,  if  they  do  not,  with  the  state  tax  re- 
moved inequalities  will  be  of  less  importance.  There  is  no 
longer  friction  between  the  counties  concerning  the  ratio 
of  assessed  valuation  to  real  value,  but  conflicts  between 
the  different  towns  of  each  county  are  undiminished.1 

Separation  has  by  no  means  brought  complete  equaliza- 
tion of  the  tax  burdens ;  but  it  has  succeeded  in  reaching  a 
large  amount  of  property  which  was  formerly  untaxed; 
and  however  unequal  the  present  burdens,  they  are  much 
more  nearly  uniform  than  under  the  former  system. 

Up  to  the  present,  the  system  has  had  good  results. 
Separation  was  introduced  in  California  to  accomplish 

1  To  cite  an  example  of  this,  in  Santa  Clara  County  one  town  was 
given  a  "  scientific  valuation  "  for  city  purposes,  with  the  result  that  the 
rate  of  assessment  was  raised  fifteen  to  twenty-five  per  cent.  The  same 
valuation  was  then  used  for  the  county  assessment,  with  the  result  that 
this  town  was  forced  to  pay  relatively  a  larger  proportion  of  county 
taxes  than  the  other  towns  of  the  county.  Dissension  among  the  towns 
ensued,  but  no  satisfactory  agreement  could  be  reached. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [466 

one  main  end, — the  equalization  of  the  burden  of  taxes. 
Increased  revenue  also  was  hoped  for,  but  this  was 
secondary.  The  rapid  rise  in  expenditure  was  met  by 
the  general  property  tax,  although  the  taxpayers  were 
becoming  restless  under  the  growing  burden,  largely 
owing  to  the  increasing  inequalities.  Through  the 
system  of  separation  adopted  it  was  hoped  first  to  equalize 
assessments  under  the  general  property  tax;  second  to 
shift  part  of  the  burden  from  real  estate  to  corporate  prop- 
erty, thus  reaching  much  of  the  intangible  property  which 
was  escaping.  The  division  of  corporate  and  other  prop- 
erty between  the  state  and  the  localities  was  largely  a  matter 
of  expediency.  In  this  way,  it  was  believed,  administration 
could  be  made  most  effective  and  the  greatest  equality  be 
obtained.  The  argument  was  advanced  that  the  state  had 
the  best  right  to  tax  corporate  property  and  that  real  estate 
owed  its  allegiance  primarily  to  the  local  government,1  but 
this  was  put  forward  largely  to  support  a  division  suggested 
by  expediency.  Had  this  been  the  serious  purpose  of 
separation  more  attention  would  have  been  paid  to  adapting 
the  state's  revenue  to  its  needs,  and  less  to  making  the  burden 
on  state  taxed  property  exactly  equal  to  that  on  locally 
taxed  property.  Although  the  pressure  for  funds  has  en- 
couraged the  frequent  revision  of  the  rates  on  corporations, 
keeping  them  abreast  of  the  rates  on  other  property,  it  has 
never  been  suggested  that  these  rates  might  exceed  those 
on  locally  taxed  property.  It  is  an  equal  burden,  above  all 
else,  that  has  been  desired,  and  a  more  equal  burden  has 
in  fact  been  realized,  although  there  is  much  to  be  desired. 

Concerning  the  future  of  the  system,  there  seems  to  be 
only  one  real  problem,  viz.,  the  adequacy  of  state  revenues. 
The  localities  have  proved  conclusively  that  they  can  pro- 

1  Report  of  Commission  on  Revenue  and  Taxation,  1906,  p.  79  et  seq. 


467]  SEPARATION  IN  CALIFORNIA 

vide  for  themselves  quite  as  readily  with  separation  as  with 
the  old  method.  They  have  not  lost  their  elastic  system, 
and,  though  the  base  of  the  local  tax  has  been  narrowed, 
this  has  for  the  most  part  worked  no  hardship.  The  loss 
from  the  withdrawal  of  operative  property  has  been  more 
than  offset  in  most  cases  by  the  gain  through  the  removal 
of  the  state  tax. 

There  seems  to  be  little  likelihood  of  extravagant  ex- 
penditure in  the  future.1  The  pressure  for  revenues  which 
is  now  being  experienced  should  prove  an  effective  check, 
both  on  the  legislature  and  on  the  people,  in  any  movement 
toward  reckless  appropriations,  and  there  seems  to  be  no 
chance  of  relieving  such  pressure  without  reimposing  a 
direct  state  tax  on  either  property  or  income,  thus  placing 
the  burden  directly  on  those  controlling  expenditure. 

As  for  home  rule  in  taxation,  the  agitation  for  such  a 
measure  has  not  met  with  such  popularity  that  it  need  be 
seriously  considered.  Home  rule — i.  e.,  local  option  in  ex- 
empting property  from  taxation — has  been  advocated  ever 
since  the  new  system  has  been  in  operation.  An  amend- 
ment providing  that  each  district,  town,  city  and  county 
(more  than  four  thousand  political  subdivisions)  should 
have  the  right  to  devise  its  own  system  of  taxing  and  classi- 
fying property  for  purposes  of  taxation  and  exemption  was 
put  before  the  people  of  the  state  at  a  general  election  in 
1912,  but  was  defeated  by  a  majority  of  over  50,000. 2  A 
similar  amendment,  voted  on  in  1914,  met  a  similar  fate.3 
This  does  not  indicate  a  growing  movement  in  favor  of 
home  rule. 

1The  state  tax  commission  (Report,  1917,  p.  n)  believes  that  there 
is  danger  of  state  extravagance. 

2  In    San    Francisco   a   majority   of    10,000   voted   in    favor   of   this 
amendment. 

3  Report  of  State  Board  of  Equalisation,  1914,  p.  59. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [468 

Concerning  decentralization  of  administration,  the  move- 
ment in  that  direction  seems  already  to  have  spent  its  force. 
For  the  future  everything  points  toward  centralization. 
No  positive  steps  have  been  taken,  further  than  placing  cor- 
porate property  under  state  control,  but  there  is  increasing 
agitation  both  for  a  state  tax  commission  with  larger 
powers  than  the  state  board  of  equalization,  and  the  state 
appointment  of  local  assessors.  Should  such  steps  be  taken, 
California  would  rank  with  the  foremost  states  in  the  cen- 
tralization of  fiscal  administration. 

But  the  problem  of  adjusting  state  revenue  to  needs  re- 
mains unsolved.  There  has  been  a  large  increase  in  reve- 
nues under  the  new  system,  even  greater  than  was  antici- 
pated, but  the  increase  in  expenditures  has  easily  kept  pace 
with  it,  and  while  the  rates  on  gross  earnings  of  public 
utilities  have  twice  been  raised,  the  changes  have  been  made 
in  accordance  with  the  growth  of  the  local  general  property 
tax,  and  not  in  accordance  with  the  growth  of  state  expen^ 
ditures. 

Many  new  sources  of  revenue  are  being  suggested,  among 
them  business  licenses,  particularly  liquor,  a  stock  transfer 
tax,  stamp  taxes,  and  an  income  tax.  The  liquor  and  in- 
come taxes  are  receiving  special  consideration.  Any  of 
these  sources  would  relieve  the  immediate  pressure  for 
revenue,  but  none  would  introduce  the  desired  element  of 
elasticity,  with  the  possible  exception  of  the  income  tax, 
which  might  be  introduced  with  a  varying  rate.  Every 
effort  is  being  made  to  avoid  a  return  to  the  general  prop- 
erty tax  for  state  purposes.  No  action  has  yet  been  taken, 
but  should  any  of  the  sources  under  consideration  be 
adopted  the  danger  of  a  deficit  would  be  averted  for  some 
time  at  least. 

But  even  if  it  should  be  found  necessary  to  revert  to  a 
state  ad  valorem  tax  on  general  property,  the  benefits  of 


469]  SEPARATION  IN  CALIFORNIA 

separation  would  not  entirely  disappear.  It  would  again 
be  to  the  interest  of  the  counties  to  hold  their  rate  of  as- 
sessed valuation  low;  the  burden  on  real  estate  would  be 
again  increased  out  of  proportion  to  that  on  personalty;  in 
short,  the  general  property  tax,  with  all  of  its  attendant 
evils,  would  be  reestablished.  But  these  evils  would  be  less 
flagrant  than  formerly.  For  the  state  corporation  taxes, 
which  are  reaching  effectively  property  which  before 
escaped,  would  be  retained,  and  consequently  the  ad  valorem 
tax  on  general  property  would  be  at  most  considerably 
lighter  than  under  the  old  system. 


CHAPTER  X 

THE  MOVEMENT  TOWARD  SEPARATION  IN  THE  UNITED 
STATES  AS  A  WHOLE 

THE  states  thus  far  considered  are  those  which  have 
carried  separation  so  far  that  it  has  become  a  distinc- 
tive feature  of  their  systems ; *  but  separation  exists  in  so 
many  forms  and  in  such  varying  degrees  in  the  United 
States  that  a  complete  account  would  involve  some  descrip- 
tion of  the  revenue  systems  of  every  state.  A  detailed  ex- 
amination is  unnecessary  for  purposes  of  this  study,  but  it 
is  important  to  consider  certain  phases  of  the  subject  with 
reference  to  more  of  the  states  than  have  thus  far  been  dis- 
cussed. 

To  begin  with,  the  question  whether  the  tendency  toward 
separation  is  increasing  can  be  answered  only  by  observing 
the  trend  in  all  of  the  states.  The  fact  that  of  those  states 
which  have  carried  separation  farthest,  Connecticut,  New 
York  and  Vermont  have  apparently  abandoned  it  perma- 
nently in  its  complete  form,  and  that  California  is  main- 
taining it  only  with  difficulty,  would  suggest  that  the  move- 

1  Virginia,  of  which  no  special  account  has  been  given  attained 
partial  separation  in  1915.  This  was  made  possible  by  the  provision 
of  the  new  constitution,  adopted  in  1902,  which  permits  classification 
for  taxation  after  1912.  Real  estate  and  tangible  personalty  is  subject 
to  local  taxation  only,  except  for  a  lo-cent  school  tax.  Intangible  per- 
sonalty except  money,  is  subject  to  a  state  tax  of  65  cents  per  $100. 
Counties  may  add  as  much  as  35  cents  per  $100  to  this  tax.  (New 
York  Tax  Reform  Association  Bulletin,  no.  560,  p.  8.)  Since  separa- 
tion is  only  partial,  and  since  it  has  been  accomplished  too  recently  for 
its  effects  to  be  apparent,  it  would  not  be  worth  while  to  give  it  special 
consideration. 

176  [470 


47i]  IN  THE  UNITED  STATES  AS  A  WHOLE 

ment  has  spent  its  force.  Examination  of  the  development 
in  other  states,  however,  indicates  a  growth  of  the  move- 
ment. To  draw  a  definite  line  between  separate  and  other 
sources  of  revenue  would  be  arbitrary  and  without  signifi- 
cance. Instead,  the  proportion  which  the  general  property 
tax  bears  to  other  state  revenues  has  been  chosen  as  the 
better  index  of  the  growth  of  separation,  since  after  all  the 
movement  is  primarily  an  effort  to  abolish  the  general  prop- 
erty tax.  Taking  the  period  from  1903  to-  1913  (for  which 
alone  comparable  figures  are  available)  a  decrease  in  the 
proportion  of  the  state  general  property  tax  to  total  state 
revenue  receipts  is  shown  in  twenty-nine  states  and  an  in- 
crease in  seventeen.  This  does  not,  for  the  most  part,  mean 
an  absolute  decline  in  the  general  property  tax  receipts — 
only  in  six  states  does  such  an  absolute  decrease  occur — but 
it  does  mean  a  growth,  relative  as  well  as  absolute,  in  the 
receipts  from  other,  and  mainly  from  separate,  sources. 

TABLE  XXII  i 

PERCENTAGE  OF  STATE  REVENUE  RECEIPTS  OBTAINED  FROM  OTHER  SOURCES 
THAN  THE  GENERAL  PROPERTY  TAX,  1903-1913 

Percentage  from  Othw  Sources  Number  of  States 

7 ban  Property  Tax  1903  1913 


1-20%  3  2 

21-40  18  15 

41-60  15  15 

61-80  7  8 

81-100  5  8 

This  is  the  result  of  the  growth  of  special  taxes  which  form 
such  an  important  part  of  the  systems  of  those  states  in 
which  separation  is  most  nearly  complete.  The  reports  of 
state  officials  indicate  that  this  process  will  continue  for 
some  time  unabated — even  though  in  many  cases  there  is  no 

1  Estimated  from  data  in  Wealth,  Debt  and  Taxation,  1913,  vol.  ii, 
PP.  36-39. 


I78   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [472 

expectation  of  reducing1,  much  less  of  abandoning,  the  state 
general  property  tax.  There  is  an  unmistakable  growth  in 
popularity  of  corporation,  inheritance  and  income  taxes. 
Corporation  taxes  are  already  employed  in  one  form  or 
another  in  practically  every  state ;  inheritance  taxes  are  now 
used  in  all  but  nine  states;  and  the  income  tax,  though 
actually  in  force  in  only  seven  states  (and  unimportant  in 
most  of  these),  is  much  advocated.  There  is  also  a  move- 
ment, owing  to  the  growing  need  of  special  taxes,  to  abolish 
all  "  equal  and  uniform  "  clauses  from  the  constitutions. 
These  clauses,  by  demanding  that  all  property  be  taxed  at 
the  same  rate  and  in  the  same  way,  have  interfered  with, 
and  in  most  cases  prevented  altogether,  classification  for 
taxation,  Nearly  half  of  the  states  are  still  thus  hampered, 
although  constitutions  are  being  amended  so  as  to  abolish 
such  restrictions  almost  yearly.1  All  of  these  changes  make 
separation  more  possible  and  an  increase  in  separation 
almost  invariably  follows. 

The  second  question,  which  has  so  far  only  been  partially 
answered  is :  What  are  the  conditions  which  encourage 
separation?  Speaking  broadly,  the  general  property  tax 
forms  the  largest  proportion  of  state  revenues  in  the  states 
west  and  south,  and  a  much  smaller  proportion  in  those 
east  and  north.  Yet  there  are  many  exceptions.  Califor- 
nia, for  instance,  has  complete  separation,  and  Maine  ob- 
tains half,  and  New  Hampshire  more  than  half  of  state 
revenues  from  the  general  property  tax.  Further,  the  two 
states  depending  most  on  the  property  tax  (Arizona,  where 
it  forms  81  per  cent,  and  Michigan,  where  it  forms  85  per 
cent  of  state  revenues)  would  seem  to  have  few  character- 

:This  material  has  been  derived  mainly  from  the  Census  Report, 
Wealth,  Debt  and  Taxation,  1913.  It  has  been  checked  and  brought  up 
to  date  (March,  1917),  by  Conference  Proceedings;  Bulletins  of  the 
New  York  Tax  Reform  Association;  year  books  and  state  tax  reports. 


473]  IN  THE  UNITED  STATES  AS  A  WHOLE 

istics  in  common.1  However,  eight  of  the  nine  states  with 
a  large  degree  of  separation  are  grouped  together,  and  four 
states  adjoining  these  (Massachusetts,  Rhode  Island,  Vir- 
ginia and  Ohio),  depend  on  the  property  tax  for  less  than 
one-third  of  state  revenues.  It  may  be  said,  in  spite  of 
notable  exceptions,  that  separation  has  followed  industrial 
development. 

There  is  also  a  very  immediate  relation  between  separa- 
tion and  growing  expenditure.  Although  expenditure  in 
twenty-six  of  the  states  did  not  increase  as  much  as  one  hun- 
dred per  cent  in  the  years  1902-1912,  Delaware  alone  of  the 
states  having  separation  is  included  in  this  group.  The 
reason  is  obvious.  On  the  one  hand,  industrial  develop- 
ment and  growing  population  call  for  extension  of  govern- 
mental activities,  and  consequently  for  increased  revenues; 
on  the  other  hand,  such  development  puts  an  increasing  pro- 
portion of  wealth  in  forms  difficult  to  reach  by  the  general 
property  tax.  Under  this  double  strain  the  financial  system 
breaks,  special  taxes  are  introduced,  the  general  property 
tax  declines  and  separation  grows.  Some  states  with  large 
corporate  wealth,  e.  g.,  Michigan,  have  made  heroic  efforts 
to  retain  the  general  property  tax.  Others,  where  state  ex- 
penditures are  comparatively  small,  have  kept  the  general 
property  tax  small  without  corporation  taxes.  North  Da- 
kota, for  instance,  with  a  large  income  from  the  rent  and 
sale  of  public  lands,  uses  the  general  property  tax  for  less 
than  forty  per  cent  of  state  revenues.  But  in  the  main  the 
states  with  the  highest  industrial  development  have  been 
forced  to  adopt  special  taxes  while  the  agricultural  states 
have  neither  had  the  incentive  to  do  so,  nor,  their  wealth 
being  largely  in  real  estate,  have  they  had  the  opportunity  to 

1  The  apparent  explanation  in  this  case  is  that  both  are  important 
mining  states  and  have  developed  an  effective  system  of  mining  taxation 
under  the  general  property  tax. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [474 

profit  by  it.  Kentucky,  after  carefully  considering  the  re- 
placing of  the  general  property  tax  with  special  taxes, 
eliminated  the  proposal  because  of  the  small  amount  of 
corporate  wealth  in  the  state.1 

A  comparison  of  assessed  values  in  states  with  and  with- 
out separation  shows  little  difference.  The  highest  as  well 
as  the  lowest  ratios  of  assessment  appear  in  states  without 
separation.  Separation  appears,  however,  to  have  had  some 
small  influence  in  raising  the  ratios  of  assessment  in  cities. 

There  is  a  growing  and  widely  commended  tendency  in 
the  United  States  to  centralize  administration  in  financial 
matters.  The  increase  in  state  tax  commissions  and  com- 
missioners, and  the  widening  powers  of  state  boards  of 
equalization  and  other  state  financial  boards  and  officials, 
are  all  indications  of  this.  The  movement  is  widespread, 
appearing  in  those  states  depending  only  slightly  on  the 
general  property  tax  as  well  as  in  those  using  it  as  the  main 
source.  It  has  arisen,  much  as  separation  has  arisen,  to 
cure  the  evils  of  the  general  property  tax — although  it  is  of 
equal  importance  applied  to  any  locally  administered  tax 
where  uniformity  in  the  different  taxing  jurisdictions  is  for 
any  reason  desirable. 

A  study  of  this  tendency  leads  to  the  conclusion  that  it 
is  a  distinct  movement,  related  to  separation  only  in  that 
both  are  the  outcome  of  the  search  for  greater  efficiency. 
Very  few  states  are  without  some  central  financial  board 
or  official,  having  supervision  over  local  administration,  at 
least  to  the  extent  of  equalizing  local  assessments  for  state 
purposes;  but  in  spite  of  this  little  effective  control  has  been 
developed.  General  supervisory  powers  are  not  enough. 
Frequently  the  officials  are  without  the  power  or  the  equip- 
ment to*  obtain  the  necessary  information.  More  often  they 

1  Report  of  the  Special   Tax   Commission  of  Kentucky,   1912-1914,, 
pp.  103-104. 


475]  IN  THE  UNITED  STATES  AS  A  WHOLE  jgi 

are  hampered  in  the  use  of  the  information  they  have  ob- 
tained, either  because  of  limited  powers  of  changing  equal- 
ized values  or  because  of  lack  of  control  over  the  local 
officials.  It  is  generally  conceded  that  effective  control  over 
local  officials  can  be  obtained  only  through  the  central 
powers  of  appointment  and  removal.  These  powers  have 
rarely  been  granted.  Only  eight  states  thus  far  have  given 
to  state  officials  any  power  of  appointment  or  removal  of 
local  officials,  and  the  power  granted  by  these  states  is  very 
limited.1  Only  in  one  state  (North  Carolina)  are  the 
county  assessors  themselves  appointed  by  state  officials.  In 
other  states  the  officials  appointed  are  not  those  really  con- 
trolling administration.  Where  the  power  of  removal  is 
granted  it  is  generally  limited  to  cases  of  wilful  negligence, 
which  is  in  practice  impossible  to  prove. 

Central  control  of  local  financial  administration  is  only 
nominal  as  yet,  but  there  is  nothing  to  suggest  that  separa- 
tion is  seriously  interfering  with  the  movement.  Of  the 
eight  states  attempting  to  control  local  officials,  one,  New 
Jersey,  has  essentially  complete  separation,  and  three  obtain 
more  than  sixty  per  cent  of  state  revenues  from  separate 
sources.  Both  centralization  and  separation  aim  to  abolish 
the  evils  of  unequal  assessments.  In  so  far  as  separation 
abolishes  these  evils — which  it  does  to  a  limited  extent — 
the  need  of  centralization  is  lessened.  But  inasmuch  as  it 
cannot  in  any  large  measure  equalize  assessments,  the  need 
of  centralization  remains,  and  will  doubtless  be  met.  Sep- 
aration does  not  prevent  it,  though  it  does  to  some  extent 
discourage  it.  , 

1  See  supra,  p.  178  n. 


CHAPTER  XI 
CONCLUSIONS 

THE  study  of  the  gradual  growth  of  the  separation  of 
sources  of  state  and  local  revenues  in  the  United  States 
during  the  past  fifty  years  leads  to  the  conclusion  that  this 
growth  has  been  primarily  an  incidental  result  of  the  effort 
to  supplement  the  general  property  tax.  When  poor  admin- 
istration has  made  this  system  inadequate,  special  taxes  have 
been  placed  on  definite  classes  of  property— taxes  which  the 
state  can  administer  successfully.  Separation  has  been  only 
secondarily  a  conscious  "  reform "  offered  as  a  definite 
remedy  for  unequal  assessments  and  other  administrative; 
ills.  Of  still  less  importance  has  been  the  argument  that  that 
government  whose  people  are  the  cause  of  the  creation  of  a 
value  has  the  best  right  to  tax  it. 

Although  separation  was  definitely  advocated  even  before 
1880,  the  movement  during  these  early  years  was  small  and 
but  little  discussed,  no  state  accepting  it  as  a  definite  goal 
toward  which  to  strive.  Agitation  has  increased  in  the  last 
twenty  years,  but  interest  after  all  has  centered  around 
'individual  taxes  rather  than  around  tax  systems.  Every 
conceivable  form  of  corporation  tax  has  been  experi- 
mented with,  and  the  possibilities  of  inheritance  taxation 
and  of  special  taxes  on  intangibles  have  been  rapidly 
developed.  The  result  has  been  steady  progress  toward 
separation  in  many  states  and  the  advantages  of  separa- 
tion have  often  been  advanced  in  these  as  an  additional 
reason  for  change.  But  California  is  the  only  state 
achieving  separation  without  a  preceding  period  of  slow 
182  [476 


477]  CONCLUSIONS  183 

development  in  that  direction.    In  no  other  state  where  the 
introduction  of  separation  involved  a  radical  change  in  the 
seriously  considered  in  several  cases.1 
financial  system  has  it  been  adopted,  though  it  has  been 

The  ends  sought  (conscious  and  unconscious)  by  the 
movement  toward  separation  have  been  larger  revenues  and 
better  administration.  These  have  to  some  extent  been 
attained. 

A  further  result — considered  by  Professor  Plehn  to  be 
the  most  important — which  those  advocating  separation  as 
in  itself  a  desirable  step  have  hoped  to  attain,  is  an  equitable 
division  of  the  yield  of  taxes  between  state  and  local  au- 
thorities. By  equitable,  as  already  explained,  is  meant  a 
division  which  gives  to  each  jurisdiction  the  revenues  derived 
from  those  values  which  have  been  created  by  the  people 
living  within  that  jurisdiction.2  Whether  or  not  this  has 
been  realized  is  difficult  to  ascertain.  Unquestionably  the 
value  of  some  corporations,  such  as  gas  companies,  is  created 
by  local  conditions;  that  of  others,  such  as  munitions  fac- 
tories at  the  present  time,  is  in  large  part  of  international 
origin.  On  the  other  hand  much  of  the  value  of  real  estate 
is  derived  from  sources  outside  of  the  immediate  locality. 
But  in  spite  of  these  exceptions  a  division  which  gives  real 
estate  to  the  localities  and  corporate  property  to  the  state 
corresponds  in  some  measure  with  the  division  of  revenues 
desired.  If  this  is  advantageous,  and  in  some  cases  the 
advantage  is  quite  apparent,3  then  separation  has  partially 
achieved  a  desirable  end  which  can  be  achieved  in  no  other 
way.  This  particular  gain  would  be  lost  if  an  income  tax 
were  made  the  principal  source  of  state  revenues,  as  is  often 

1  E.  g.,  Louisiana,  Iowa,  Missouri  and  Kentucky. 

2  Supra,  p.  16. 

3  See  discussion  of  railroad  taxation  in  California,  supra,  p.  136. 


SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [478 

advocated,  for  the  ultimate  source  of  a  general  income  tax 
and  of  a  general  property  tax  must  be  the  same.  But  this 
gain  from  the  division  of  sources  is  not  a  vital  one.  It  will 
lose  its  significance  more  and  more  as  the  individual  com- 
munities and  states  become  increasingly  interdependent. 

Separation  is  only  one  of  many  ways  to  improve  admin- 
istration and  increase  revenues.  Yet  it  has  been  mainly  to 
accomplish  these  ends  that  it  has  been  introduced.  The  ad- 
ministrative reform  hoped  for  has  been  the  equalization  of 
assessments.  The  influence  of  separation  in  this  respect 
cannot  extend  to  the  inequalities  between  the  smaller  dis- 
tricts and  between  properties  of  different  kinds,  and  of  the 
same  kind,  within  each  district, — which  are  very  serious; 
but  it  has  been  expected  that  the  inequalities  between  coun- 
ties (or  other  divisions  which  may  be  used  as  the  local  units 
of  assessment)  would  disappear  with  the  removal  of  the 
state  tax  which  encouraged  underassessment. 

To  some  extent  in  California  and  New  York,  particularly 
in  the  latter  state,  ratios  of  assessed  to  real  value  have  been 
raised  in  the  larger  cities, — notably  in  New  York  city  where 
the  ratio  is  approximately  one  hundred  per  cent.  Separation 
has  encouraged  this  in  a  negative  way  by  removing  the  state 
tax.  In  New  York  city,  at  least,  such  an  increase  would 
not  have  been  permitted  had  it  not  been  confidently  expected 
that  the  state  tax  would  not  be  again  imposed.  But  the 
real  reason  for  the  high  ratios  is  that  they  have  been  neces- 
sitated by  the  tax  and  debt  limits  on  the  municipalities  of 
these  states.  The  cities  have  been  forced  to  raise  their 
assessments  to  this  extent  in  order  to  obtain  the  neces- 
sary money  to  carry  on  their  activities.  In  rural  districts 
where  expenditures  are  small  there  has  been  no  indication 
of  an  effort  to  increase  the  assessment  ratio.  In  California 
the  latest  estimate  (1916)  gives  the  average  assessment 
ratio  as  43  per  cent.  As  earlier  estimates  were  at  45  per 


479]  CONCLUSIONS  185 

cent  there  has  apparently  been  no  gain  here.  In  New  York, 
outside  of  a  few  of  the  larger  cities,  the  average  ratio  is 
about  seventy  per  cent,  as  it  was  before  separation. ,  In  Con- 
necticut ratios  of  assessment  were  first  increased  when  the 
state  direct  tax  was  reimposed  in  1910.  In  New  Jersey 
where  an  actual  increase  has  been  realized  it  can  be  ac- 
counted for  by  better  methods  of  administration.  Separa- 
tion cannot  be  credited  with  any  important  gains  in  this 
respect. 

Certain  actual  gains  have,  however,  been  realized.  First, 
in  the  absence  of  the  state  tax  the  inequalities  between  coun- 
ties are  of  less  consequence  than  before;  second,  with  the 
introduction  of  special  taxes  many  of  the  classes  of  property 
difficult  to  assess  under  the  general  property  tax  are  reached 
in  other  ways,  and  the  general  property  tax  itself  has  de- 
clined, relatively,  in  importance,  so  that  its  inequalities  are 
less  serious  than  they  would  otherwise  have  been. 

But  the  general  property  tax,  even  when  given  up  en- 
tirely by  the  state,  remains  an  exceedingly  important  factor, 
and  its  effective  administration  is  of  concern  to  all.  Equali- 
zation of  assessment  is  not  attained  automatically  through 
separation.  On  the  contrary  separation  is  apt  to  deaden 
state  interest  and  in  consequence  to  encourage  the  with- 
drawal of  state  control,  and  in  that  way  to  remove  the 
only  available  means  of  attaining  uniformity. 

Separation  has  been  opposed  on  this  ground, — that  it 
leaves  the  local  divisions  unsupervised  in  administering  their 
revenue  systems ;  in  other  words,  that  it  is  a  counter-current 
toward  decentralization  in  the  far  greater  movement  of  fiscal 
development  in  the  direction  of  centralization  of  financial 
control.1  The  advocates  of  separation,  however,  claim 2 

1  Annals  of  the  American  Academy  of  Political  and  Social  Science, 
1915,  vol.  Iviii,  p.  134  et  seq. 

2  Seligman,  op.  cit.,  p.  367. 


!86   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [480 

that  separation  does  not  lead  to  decentralization.  This  study 
has  shown  that  separation,  by  removing  the  immediate  in- 
terest of  the  state  in  local  affairs,  has  in  some  cases  retarded 
centralization.  Vermont  definitely  gave  up  the  function  of 
equalizing  local  assessments  in  1884,  thus  taking  a  step 
backward,  but  more  recently  (1910)  enlargement  of  the 
powers  of  the  commissioner  of  taxes  has  increased  control 
of  local  administration.  In  California  also  the  state  board 
of  equalization,  without  giving  up  the  power  of  equalization 
ceased  to  exercise  it  after  the  introduction  of  separation. 
Efforts  are  now  being  made,  however,  to  extend  state  super- 
vision. Separation  in  Pennsylvania  has  not  been  the  cause 
of  any  definite  change  in  administrative  control,  but  the  fact 
that  locally  administered  state  taxes  are  more  carefully 
supervised  than  locally  administered  local  taxes  suggests  that 
separation  has  checked  centralization  in  some  degree.  New 
York  and  Connecticut  have  not,  and  never  have  had,  effective 
control  of  the  general  property  tax,  but  it  is  doubtful 
whether  without  separation  they  would  have  attained  it. 
Other  states  without  separation  have  not  done  so.  Separ- 
ation, negatively,  encourages  decentralization  in  so  far  as 
the  general  property  tax  is  concerned;  but  it  cannot  there- 
fore be  regarded  as  a  positive  step  toward  decentralization. 
On  the  contrary7  it  would  seem  to  be  a  stage  in  the  move- 
ment toward  centralization.  In  some  cases,  as  has  been 
pointed  out,  it  has  removed  some  small  degree  of  state 
control  from  local  administration,  and  in  other  cases  it  has 
retarded  the  growth  of  such  control;  but  this  has  not  oc- 
curred in  all  cases,  and  where  it  has  occurred  it  applies  only 
to  the  general  property  tax.  Furthermore,  such  state  con- 
trol as  has  existed  has  been  scarcely  more  than  nominal. 
The  gain  in  centralization  through  putting  certain  classes 
of  property  difficult  of  local  assessment  directly  into  the 
hands  of  state  officials  has  more  than  offset  any  loss  in 


481]  CONCLUSIONS  jg; 

giving  up  state  supervision  of  the  general  property  tax. 
As  one  by  one  the  different  classes  of  property  are  removed 
from  the  category  of  general  property,  and  as  the  various 
special  taxes  begin  to  outweigh  the  old  general  property  tax 
in  importance,  it  will  become  only  one  of  many  of  the  ob- 
jects of  state  administration.  Of  course,  the  general  prop- 
erty tax  is  still  far  from  becoming  unimportant,  even  though 
relegated  to  the  localities.  Rather,  the  rapidly  growing 
needs  of  cities  are  making  it  a  matter  of  more  vital  concern 
than  ever  before,  and  as  it  grows  in  importance  the  need  of 
central  administration  becomes  more  apparent. 

Real  central  control  of  local  financial  administration  has 
not  as  yet  been  attained  anywhere  in  the  United  States.  Most 
sources  of  local  revenues,  other  than  the  general  property 
tax,  have  always  been  locally  controlled.  As  for  central 
control  of  the  general  property  tax,  this  can  be  attained  only 
through  adequate  central  powers  of  appointment  and  re- 
moval of  local  officials.  These  have  not  been  granted  in 
any  state,  but  they  are  quite  compatible  with  separation, 
and  will  probably  appear  in  those  states  where  separation 
exists  as  soon  as  in  others,  since  separation  has  not  in  any 
measurable  degree  done  away  with  the  need  of  them.  In 
so  far  as  centralization  of  the  administration  of  local 
finances  has  been  attained  at  all  in  this  country  it  has  been 
attained  as  readily  with  separation  as  without.  West  Vir- 
ginia has  some  central  supervision  of  the  administration  of 
local  finances  although  local  officials  are  elective.  New 
Jersey  has  as  effective  central  supervision  as  any  other  state. 
The  state  board  of  equalization  has  wide  powersi,  even  in- 
cluding the  removal  of  local  assessors — though  as  already 
pointed  out  this  last  power  is  little  more  than  nominal ;  and 
county  boards  of  equalization  are  appointed  by  state 
officials. 

The  administration  of  state  finances  has  been  distinctly 


Z88   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [482 

centralized  by  separation.  The  locally  administered  general 
property  tax  has  been  supplanted  by  new  special  taxes 
directly  under  state  administration. 

The  large  increase  in  revenues  expected  from  separation 
has  been  •  cited  as  both  a  danger  and  an  advantage.  The 
danger  was  felt  to  be  in  the  creation  of  large  sources,  the 
burden  of  which  the  people  in  general — who  are  ultimately 
responsible  for  all  expenditures — would  not  feel. 

This  fear  that  separation  would  encourage  unnecessary 
and  extravagant  state  and  local  expenditures  is  apparently 
unfounded.  Separation  would  provide  an  opportunity  for 
extravagance  in  local  expenditure  only  at  first  when  a  de- 
cided decrease  in  the  demands  on  the  general  property  tax 
occurs;  for  only  at  such  a  time,  probably,  would  unneces- 
sary local  expenditures,  the  burden  of  which  would  fall 
directly  on  the  people,  pass  unchallenged.  In  most  cases 
separation  has  been  introduced  so  gradually  that  no1  large 
decrease  has  occurred;  and  in  the  few  cases  where  there 
has  been  a  sudden  change  there  has  been  no  indication  that 
local  officials  have  taken  advantage  of  it.  Expenditures 
have  risen  steadily  and  rapidly  with  the  extension  of  gov- 
ernmental activities,  but  such  increase  is  scarcely  more  char- 
acteristic of  states  with  separation  than  of  states  without. 

It  is  in  state  expenditures,  however,  rather  than  local, 
that  such  extravagance  has  been  most  confidently  antici- 
pated. The  assumption  is  that  the  removal  of  the  state 
direct  tax  will  remove  the  one  restraining  force;  that  the 
people,  no  longer  paying  directly  for  expenditures  incurred, 
will  freely  authorize  appropriations  for  unnecessary  and 
even  extravagant  purposes.  This  may  occur  in  some  small 
measure  but  there  are  a  number  of  influences  to  check  it. 
In  the  first  place  any  great  extension  of  expenditures  leads 
almost  inevitably  to  a  return  to  the  general  property  tax. 
Secondly,  in  most  states  the  people  have  no  such  direct  con- 


483]  CONCLUSIONS  189 

trol  of  expenditures  as  this  implies.  Economy  or  extrava- 
gance is  apparently  due  to  responsible  or  irresponsible 
budget  procedure  rather  than  to  the  system  of  taxation.1 
Flagrant  misuses  of  the  general  property  tax  revenue  would 
doubtless  in  time  be  realized  and  stopped  by  the  people ;  but 
past  experience  seems  to  indicate  that  the  corporations 
which  bear  the  weight  of  the  burden  under  most  systems  of 
separation  are  quite  as  sensitive  to  taxes  as  the  people  at 
large,  and  quite  as  capable  of  preventing  excessive  levies. 
And  more  than  this,  even  though  the  rate  on  corporations 
is  frequently  changed,  it  is  not  adjusted  to  annual  needs, 
and  only  occasionally  has  it  proved  ample  enough  to  allow 
any  excessive  expenditures.  That  these  influences  have  out- 
weighed those  encouraging  extravagance  is  shown  by  the 
growth  in  expenditures  in  those  states  experimenting  with 
separation.  Expenditures  have  grown  more  rapidly,  on  the 
whole,  in  these  states  than  in  most  others,  but  this  is  due, 
as  already  explained,  to  the  fact  that  it  has  been  the  more 
advanced  states  which  have  introduced  separation  and  in 
these  expenditures  might  be  expected  to  increase  more 
rapidly  than  in  other  states  irrespective  of  the  influence 
of  separation.  Indeed  the  rapid  rise  in  expenditure 
has  begun  before  separation  has  been  attained.  Further, 
in  those  states  which  have  abandoned  separation  (vis., 
New  York,  Connecticut  and  Vermont),  the  rise  in 
expenditure  has  been  more  rapid  after  returning  tj 
the  direct  tax  than  before.  The  system  of  separation, 
which  is  adopted  to  relieve  the  pressure  for  revenues, 
at  first  easily  satisfies  all  needs;  but  in  the  end  its  com- 
parative inelasticity  hampers  the  rapid  growth  which  it 
at  first  encouraged,  and  it  is  discarded  as  incapable  o*f  sup- 
plying the  increasing  demands. 

1  Cf.  Bulletins  of  the  New  York  Bureau  of  Municipal  Research,  nos. 
62,  70,  73,  &>. 


I90   SEPARATION  OF  STATE  AND  LOCAL  REVENUES    [484 

This  inelasticity  has  thus  far  proved  to  be  the  insur- 
mountable obstacle  which  has  prevented  the  continuation  of 
separation.  No  system  of  separation  has  included  a  variable 
state  tax,  and  only  under  very  favorable  circumstances  have 
the  states  been  able  to  meet  their  needs  without  one.  Dela- 
ware and  West  Virginia,  with  comparatively  few  state 
activities,  and  light  expenditures,  have  not  suffered ;  neither 
has  New  Jersey  with  her  large  returns  from  incorporation 
fees ;  nor  Pennsylvania  with  her  well-developed  corporation 
taxes.  But  Connecticut,  New  York  and  Vermont  have  one 
by  one  returned  to  the  state  general  property  tax,  and  Cali- 
fornia, in  her  efforts  to  avoid  it,  is  continually  searching 
for  new  sources  of  revenue.  Apparently  the  states  cannot 
perform  their  proper  functions  without  a  variable  tax. 
Central  governments  in  Europe  have  operated  successfully 
without  such  a  tax,  but  central  governments  in  Europe 
have  been  for  the  most  part  thrifty  and  far-seeing;  their 
expenditures  have  increased  less  rapidly  and  less  spasmod- 
ically; their  administration  has  been  more  responsible  and 
more  efficient.  In  the  United  States  administration  has  not 
yet  attained  the  efficiency  and  responsibility  which  would 
make  such  a  system  feasible.  A  variable  tax  is  at  .present 
essential.  Such  a  tax  might  be  obtained  by  making  the 
rates  O'f  corporation  taxes  variable,  although  this  has  never 
been  advocated.  Or  the  income  tax  which  is  meeting  with 
such  favor  might  be  introduced  at  a  variable  rate.  With 
the  introduction  of  an  income  tax  for  state  purposes  com- 
plete separation  of  source  disappears  and  is  replaced  by 
what  Professor  Plehn  has  designated  as  "  true  separation." 
This  system  would  destroy  none  of  the  advantages  of  sep- 
aration of  source  with  the  exception  of  the  rather  doubtful 
advantage  of  the  allocation  of  revenues  according  to  the 
origin  of  the  values  from  which  such  revenues  are  derived. 
And  this  system  would  supply,  as  separation  has  not  always 


485]  CONCLUSIONS 

done,  sufficient  revenue.  For  even  though  the  rates  were 
fixed,  they  could  be  changed  enough  from  time  to  time  to 
keep  a  close  correspondence  between  revenues  and  expen- 
ditures. 

To  sum  up:  Separation  of  source  has  been  introduced 
primarily  to  improve  financial  administration  and  increase 
revenues.  It  has  improved  administration  of  state  finances 
to  the  extent  that  it  has  put  important  taxes  in  the  hands 
of  state  officials,  but  local  administration  is  little  better  than 
before.  This,  too,  must  be  put  under  central  control  to  be 
made  efficient — and  can  be,  for  separation  of  source  does 
not  necessitate  separation  of  administration.  There  is  noth- 
ing inherent  in  separation  of  source  which  will  either 
achieve  or  prevent  efficient  local  administration. 

Revenues  are  increased  with  the  creation  of  the  new 
taxes  which  are  generally  introduced  with  separation.  Such 
increase  of  revenues  from  taxes  not  paid  directly  by  all 
property  owners  has  not  increased  extravagant  expenditure 
appreciably,  principally  for  the  reason  that  the  control  of 
the  people  at  large  is  not  sufficiently  direct  to*  be  effective 
even  when  they  feel  the  tax.  Popular  control  of  expendi- 
tures depends  upon,  the  form  of  budget  procedure.  The  in- 
crease of  revenues  at  first  brings  relief  toi  an  overstrained 
system,  but  the  new  system  is  not  sufficiently  elastic  to  ex- 
pand rapidly  with  growing  needs.  Consequently  complete 
separation  has  been  generally  abandoned. 

There  are  no  advantages  to  be  derived  from  complete 
separation  of  sources  which  cannot  be  derived  in  other 
ways,  and  there  is  little  likelihood  that  it  will  become  a  per- 
manent feature  of  any  state's  system;  but  as  a  transitional 
stage  in  the  movement  from  the  general  property  tax  widely 
applied  to  classification  for  taxation  it  will  doubtless  play 
an  important  part.  In  the  states  where  it  has  been  intro- 
duced thus  far  it  has  been  a  mark  of  progress. 


BIBLIOGRAPHY 


GENERAL  WORKS 

Adams,  H.  C.,  Science  of  Finance  (New  York,  1899). 

Bastable,  C.  F.,  Public  Finance  (3d.  ed.,  London,  1903). 

Eastman,  F.  M.,  Taxation  For  State  Purposes  in  Pennsylvania  (Phil- 
adelphia, 1898). 

Ely,  R.  T.,  Taxation  in  American  States  and  Cities  (New  York,  1888). 

Grice,  J.  W.,  National  and  Local  Finance  (London,  1910). 

Nead,  B.  M.,  Financial  History  of  Pennsylvania,  1682-1881  (Harris- 
burg,  1881). 

Ott,  F.,  Die  Vermdgens-  und  Einkommens-Steuer  in  der  Schweiz 
(Zurich,  1914). 

Plehn,  C.  C.,    Government  Finance  in  the  United  States    (Chicago, 

IQI5). 

Seligman,  Edwin  R.  A.,  Essays  in  Taxation  (8th  ed.,  London,  1913). 
Scheftel,  Y.,  Taxation  of  Land  Value  (Boston,  1916). 

REPORTS  OF  FEDERAL  OFFICIALS 

Bureau  of  Corporations,  Special  Repot t  on  Taxation  .  .  ,  1912  (1913); 

Taxation  of  Corporations,  Pts.  i-vi  (1909-1915). 
Bureau   of   the   Census,    Financial   Statistics  of  Cities,    (1909-1915); 

Financial  Statistics  of  States,  (1915);  Wealth,  Debt  and  Taxation, 

1913  (1915,  2  vols.). 

REPORTS  OF  STATE  OFFICIALS 
Arizona: 

State  Tax  Commission,  Report,  1912. 
California: 

Commission  on  Revenue  and  Taxation,  Report,  1906;  Report,  1910; 

Constitution,  1879. 

State  Board  of  Equalization,  Biennial  Report;  Special  Report  on 
Taxation  Showing  First  Effects  of  Separation,  (1911);  Special 
Report  on  the  Relative  Burden  of  State  and  Local  Taxes,  1912, 

(1913)- 
State  Controller,  Annual  Report  of  the  Financial  Transactions  of 

Municipalities  and  Counties;  Biennial  Report ;  Revenue  Laws, 

1912. 

State  Tax  Commission,  Report,  1917. 
192  [486 


487]  BIBLIOGRAPHY 

Connecticut: 

Governor  (Bulkeley),  Message  to  the  General  Assembly,  January, 

1889. 

Special  Commission  on  the  Subject  of  Taxation,  Report  (1887). 
Special  Commission  on  the  Taxation  of  Corporations,  Report ,1913. 
Tax  Commissioner,  Address  .  .  .  Before  the  Farmers'  Association 
of  the  General  Assembly,  March  10,  1909;  Biennial  Report; 
Information   Relative  to   the  Assessment  and   Collection  of 
Taxes,  1913 ;  Quadriennial  Report  of  Indebtedness  and  Ex- 
penditures of  Municipalities  (1884-1916);  Tax  Law. 
Treasurer,  Annual  Report. 
Delaware: 

Auditor,  Annual  Report. 

State  Revenue  and  Taxation  Commission,  Report,  1909. 
Treasurer,  Annual  Report. 
Florida: 

Tax  Commission,  First  Biennial  Report,  1914. 
Illinois: 

Special  Tax  Commission,  Report  on  the  Taxation  and  Revenue 

System,  1910. 
Kentucky: 

Special  Tax  Commission,  Report,  1912-1914. 
Minnesota: 

Tax  Commission,  Biennial  Reports,  (1908-1912). 
Nebraska: 

Special  Commission  on  Revenue  and  Taxation,  Report,  1914. 
New  Jersey: 

Commission  to  Investigate  Tax  Assessments,  Report,  1912  (1913). 
Comptroller  of  the  Treasury,  Annual  Report. 
Board  of  Equalization  of  Taxes,  Annual  Report. 
Treasurer,  Annual  Report. 
New  York: 

Comptroller,  Annual  Report;  Annual  Tabulation  of  Statements 

of  Desired  Appropriations. 
Joint  Legislative  Committee,  Report,  1916. 
Tax  Commission  (Board  of  Tax  Commissioners),  Annual  Report; 

Tax  Law. 
North  Dakota: 

Tax  Commission,  Biennial  Report,  1914. 
Pennsylvania: 

Auditor  General,  Annual  Report;  Compendium  and  Brief  History 

of  Taxation  (1906). 

Secretary  of  Internal  Affairs,  Annual  Report. 
Treasurer,  Annual  Report. 


1 94  BIBLIOGRAPHY  [4gg 

Rhode  Island: 

Board  of  Tax  Commissioners,  Annual  Report,  2923. 
Vermont: 

Auditor  of  Accounts,  Report. 

Commission  on  Taxation,  Report  (1908). 

Commissioner  of  State  Taxes,  Biennial  Report;   Special  Report 
Relating-  to  Taxation,  2902. 

Report  to  the  Legislature  of  2900  on  Double  Taxation  in  Vermont. 

Treasurer,  Biennial  Report. 
West  Virginia: 

Auditor,  Biennial  Report. 

Constitution. 

Department  of  State  Tax  Commissioners,  Annual  Report,  Audit 
of  the  Finances. 

Tax  Commission,  Preliminary  Report,  2884;  Final  Report,  2884. 

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Transactions  of  the  Commonwealth  Club  of  California,  (San  Francisco). 

Weeks,  J.  D.,  Address  before  the  Managers'  Association  of  Cincinnati 
and  Hamilton  Counties,  Ohio,  March  6,  2894. 

Proceedings  of  the  National  Conference  on  State  and  Local  7~axation 
(1907-1916). 

Chapman,  D.  B.,  Inequalities  of  Town  Taxation  in  Connecticut,  A 
Paper  Read  Before  the  New  London  Board  of  Trade,  Feb.  12,  2889. 

New  York  Bureau  of  Municipal  Research  Bulletins. 

New  York  Tax  Reform  Association  Bulletins. 

Pennsylvania  Tax  Conference,  Report  on  Selling  Price,  Assessed  Valu- 
ation and  Taxation  of  Real  Estate  in  Pennsylvania,  2895. 

Addresses  and  Proceedings  of  the  State  Conference  on  Taxation  in  the 
State  of  New  York. 

ARTICLES  IN  PERIODICALS 

Adams,  T.  S.,  *'  Separation  of  State  and  Local  Revenues,"  Annals  of 
the  American  Academy  of  Political  and  Social  Science,  vol.  58 
(1915).  js~**~* 

Worthington,  T.  K.,  "  Historical  Sketch  of  the  Finances  of  Pennsyl- 
vania, ' '  American  Economic  Association  Publications,  vol.  2  (1888) . 

Schanz,  G.,  "  .Zur  Frage  des  Steuer-Prinzips  bei  den  Gemeindesteuern," 
Finanz-Archiv,  32  jhrg.,  erster  bd.  (1915). 

Journal  des  Economistes,  6  ser.,  tome  49,  (1916). 

Matthews,  J.  M.,  "Tax  Administration  in  New  Jersey,"  Journal  of 
Political  Economy,  vol.  20  (1912). 

Plehn,  C.  C.,  "Taxation  of  Franchises  in  California,"  National  Mu- 
nicipal Review,  vol.  i,  no.  3  (1912). 


489]  BIBLIOGRAPHY 

Bullock,  C.  J.,  "  Separation  of  State  and  Local  Revenues,  "  Quarterly 

Journal  of  Economics ,  vol.  24  (1910). 
Daniels,  W.  M.,  "Taxation  of  Railroad  and  Canal  Property  in  New 

Jersey,"  Quarterly  Journal  of  Economics,  vol.  20  (1906). 
McCrea,  R.  C.,  "Taxation  of  Personal  Property  in  Pennsylvania," 

Quarterly  Journal  of  Economics ,  vol.  21  (1907). 

UNIVERSITY  SERIES 

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Sowers,  D.  C.,  "Financial  History  of    New  York  State,   1798- 

1912,"  vol.  57,  no.  2  (1914). 
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52,  no.  i  (1912). 

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(1900). 
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2  (1913). 


VITA 

MABEL  NEWCOMER,  the  writer  of  this  monograph,  was 
born  in  Oregon,  Illinois,  on  July  2,  1891.  She  entered 
Leland  Stanford  Junior  University  in  1909,  receiving  the 
degree  of  A.  B.  from  the  department  of  economics  in  Jan- 
uary, 1913,  and  the  degree  o>f  A.  M.  in  June,  1914.  Dur- 
ing the  year  1915-16  she  held  the  Garth  Fellowship  in  Eco- 
nomics at  .Columbia  University,  where  she  studied  eco- 
nomics and  politics  under  Professors  Seligman,  Seager, 
Simkhovitch,  Mitchell.  Chaddock,  Beard  and  McBain. 
During  the  year  1916-17  she  has  acted  as  lecturer  in  eco- 
nomics in  Barnard  College. 

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